US Excise Tax Horizontal Interdependence: Yardstick vs. Tax Competition

US cigarette excise tax rates are state interdependent. In contrast, we cannot reject the absence of interdependence for gasoline taxation, which shows a very high degree of inertia. A one-cent increase in the neighbors’ cigarette tax rate implies a contemporaneous cigarette tax increase of around 0.24 cents. However, identifying the source of interaction is key to its normative assessment. Our empirical analysis—spanning the period 1992–2006—finds that cigarette tax interdependence is politically driven: only states with non-term-limited governors react (providing evidence of yardstick competition), basically as the election year approaches. We also show this political motivation is in accordance with List and Sturm’s (Q J Econ 121:1249–1281, 2006) hypothesis of single-issue voters: politicians tend to favor smokers when they are non-term limited, being this effect counteracted when they are term limited