Selective Tax Rates in Advertising

While driving back to Saint Louis from Wisconsin yesterday, I stopped at the Road Ranger gas station in South Beloit, Ill., which is located about 0.3 miles south of the Wisconsin-Illinois state border.

While I was loitering outside, I noticed the following sign on the front of the building:

This sign is fantastic! It acknowledges and capitalizes on the fact that tax rates affect consumer behavior. As contributors to Show-Me Daily have discussed previously, businesses and individuals tend to vote with their feet. Differences in tax rates across borders encourage individuals to shift their purchases to areas that have lower taxes.

The tax rate on cigarettes in Illinois is $0.98 cents per pack of 20. In Wisconsin, this rate is $2.52 per pack of 20. This means that an individual will pay (2.52-0.98)*10 = $15.40 more in excise taxes on cigarettes in Wisconsin than she would in Illinois. (I’m assuming that state and local sales taxes account for the $0.85 discrepancy between this number and the sign.)

I suspect that at least some number of Wisconsin residents shift their cigarette purchases to Illinois when they can, which results in higher tax revenues and more business activity in Illinois. I also suspect that this Road Ranger has higher cigarette sales than an identical gas station that’s located on the Wisconsin side of the border, as a direct consequence of this difference in tax rates.

In comparison, Missourians enjoy the lowest taxes on cigarettes in the nation, at $0.17 cents per pack. Although there have been frequent calls to increase this rate, the economy in Missouri benefits from the marginal increase in tax revenues as a direct consequence of this policy. Increasing the state tax rate on cigarettes would shift some marginal amount of this activity from Missouri to other locations.