Key Results: Cigarette Taxes and Pricing
Citations Listed in Key Results
- Higher prices and increases in taxes on cigarette and other tobacco products significantly reduce cigarette smoking and other tobacco use (Jha and Chaloupka, 1999; Jha and Chaloupka, 2000; The Task Force on Community Preventive Services, 2001; Gallet and List, 2003).
One of the most fundamental laws of economics is that of the downward sloping demand curve, stating that as the price of a product rises, the quantity consumed of that product falls. Well over one hundred studies using data from the United States and other high income countries clearly demonstrate that this law applies to tobacco products. These reductions in tobacco consumption result from:
- increased cessation among current users
- less relapse among former users
- reduced initiation among youth, and
- less consumption among continuing users.
As described in the 2000 U.S. Surgeon Generals Report Reducing Tobacco Use (DHHS, 2000), the vast majority of studies on this issue find that a 10 percent increase in cigarette prices reduces overall cigarette consumption by between 3 and 5 percent. Given the addictive nature of smoking, the long-run impact of permanent price increases is larger, as addicted smokers adjust over time to the higher prices.
Experiences in many U.S. states, as well as several other countries, suggest that this is true over a wide range of price levels and price increases, implying that additional increases in cigarette taxes and prices would lead to further reductions in smoking, even in places where taxes and prices are relatively high. More limited research on the demand for smokeless tobacco and other tobacco products similarly concludes that higher taxes on and prices for these products reduce the use of these products.
Studies that have looked separately at the impact of price on prevalence and cigarette consumption among smokers find that about half of the drop in overall consumption results from reductions in the number of smokers, while the other half comes from reduced consumption among continuing smokers. While cigarette prices are affected by many factors, research indicates that increases in excise taxes result in comparable (and at times larger) increases in prices. The findings described in the Surgeon Generals Report are quite similar to those described in other comprehensive reviews, including the following publications:
- The World Banks Curbing the Epidemic: Governments and the Economics of Tobacco Control (Jha and Chaloupka, 1999)
- The World Bank and World Health Organizations Tobacco Control in Developing Countries (Jha and Chaloupka, 2000)
- The Task Force on Community Preventive Services Guide to Community Preventive Services: Tobacco Use Prevention and Control (2001), and Gallet and Lists (2003) meta-analysis of cigarette demand studies.
- Higher cigarette taxes and prices are effective in promoting cessation among adult smokers (DHHS, 1990, 2004; CDC, 2000; Tauras and Chaloupka, 2001; Tauras, 2004; Ranson et al., 2002; Tauras and Chaloupka, 2003; Tauras et al., 2005).
Increased cessation is critical for achieving short-run reductions in the public health and economic consequences caused by smoking (DHHS, 1990, 2004). Most smokers have tried to quit smoking at least once, and nearly half attempt to quit each year; most require multiple attempts before successfully quitting (CDC, 2000). Higher cigarette taxes and prices significantly increase current smokers interest in quitting.
One recent study by Tauras and Chaloupka (2001), for example, found that a 10 percent increase in cigarette prices increased the probability of a quit attempt by between 6 and 9 percent among young adult smokers, with an even larger effect on those who were more regular smokers. In a follow-up study that allowed for relapse among some who tried to quit, Tauras (2004) concluded that a 10 percent increase in cigarette prices raised the probability of successful cessation by 3.5 percent. These findings are consistent with other economic research studies, which have reported that higher cigarette prices lower the prevalence of smoking among adults, and reduce the number of years the average smoker smokes. Ranson et al. (2002) concluded that cigarette tax increases are a highly cost-effective intervention for promoting smoking cessation.
Other recent research demonstrates that higher cigarette taxes and prices increase the demand for cessation products and services. For example, Tauras and Chaloupka (2003) and Tauras et al. (2005) found that higher cigarette prices increase sales of nicotine-replacement products, including nicotine gum and nicotine patches; a 10 percent increase in cigarette prices was found to result in a 7.5 percent increase in sales of such products. Other research reported that calls to state Quitlines go up following the implementation of state cigarette excise tax hikes.
- Cigarette tax and price increases are effective in preventing youth smoking initiation, as well as the escalation of smoking among younger persons (DHHS, 1994; CDC, 2006; Liang and Chaloupka, 2002; Tauras et al., 2001; Tauras, 2005; Lewit et al., 1981; Lewit and Coate, 1982; DeCicca et al., 2002; Chaloupka, in press; Tauras et al., 2007; Powell et al., 2005; Powell and Chaloupka, 2005; Harris and Chan, 1999; Carpenter and Cook, 2008).
Most smoking initiation occurs during adolescence, with few starting after high school graduation (DHHS, 1994). Every day, about 3,600 U.S. youth ages 12-17 try their first cigarette, while 1,100 youth in this age group become daily smokers (CDC, 2009). Youth who start smoking at younger ages are more likely to become strongly addicted to nicotine (CDC, 2006). By deterring youth smoking initiation, higher cigarette taxes and prices are an effective way to achieve long run reductions in smoking and its consequences.
Some recent studies have considered the direct and indirect influences of price on youth smoking, focusing on some of the factors that economic theory implies would lead to greater price sensitivity among youth:
- The relatively limited incomes of most youth, implying that changes in the prices of any product they consume will have a greater impact.
- The importance of peer behavior, suggesting that changes in the smoking behavior of some youths will result in changes in the smoking behavior of their peers.
- The relatively shorter smoking histories of younger smokers, suggesting that they may be less addicted and quicker to respond to price changes than their older counterparts.
- The greater propensity to discount the future among youth, implying that they will respond more to increases in the more immediate costs of smoking (such as a tax and price increase) than to increases in the future costs of smoking (such as its health consequences).
- Other indirect channels through which tax and price can influence youth smoking (e.g., through their impact on parental and other adult smoking).
The 1994 Surgeon Generals report described smoking initiation among youth as a five-stage process, moving from never smoking through a preparatory stage and then into trying, experimentation, regular smoking, and addiction. A few studies using cross-sectional data have explored the differential effects of price on this uptake process, generally concluding that price has its greatest impact on more regular smoking among youth. Liang and Chaloupka (2002), for example, find that higher cigarette prices reduce youth smoking at all levels of smoking intensity, but that they have their greatest impact on smoking at the heaviest levels.
More recent studies have used longitudinal data on youth to focus on the effects of price on youth smoking initiation and uptake. Tauras et al., 2001, using longitudinal data from the 1990s collected as part of the Monitoring the Future project, estimate that a 10 percent increase in price would reduce the initiation of any smoking by 1-3 percent, but would reduce the initiation of daily smoking by 8-12 percent and of heavy daily smoking (half a pack or more per day) by 10-14 percent. In his subsequent research on smoking escalation among young adults, Tauras (2005) reports that higher cigarette taxes and prices would be similarly effective in keeping young adults and adult smokers from moving to a higher level of consumption. In the earliest research examining differences in the effects of cigarette prices on smoking among different age groups, researchers concluded that smoking among 12- to 17-year-olds was about three times more sensitive to price than smoking among adults (Lewit et al., 1981), while smoking among young adults, ages 20 to 25, was about twice as responsive to price as overall adult smoking (Lewit and Coate, 1982).
While a few studies have found no differences in the sensitivity to price of smoking among different age groups (e.g., DeCicca et al., 2002), most have confirmed that price has a greater impact on smoking among youth and young adults than it does among older adults (Chaloupka, in press). Similarly, a smaller number of studies demonstrate that youth smokeless tobacco use is sensitive to price (Tauras et al., 2007).
In a 2005 study, Powell et al. assess the extent to which cigarette tax and price increases lower youth smoking indirectly through reductions in peer smoking. They conclude that more than one-third of the overall impact of price on youth smoking prevalence is accounted for by these peer influences. Similarly, Powell and Chaloupka (2005) consider how much of the impact of price on youth smoking comes through the reductions in parental smoking that result from cigarette tax and price increases. As with peer influences, they find that the indirect effect that works through parental smoking accounts for a significant share, about one-fifth, of the overall effects of cigarette prices on teen smoking prevalence.
- Cigarette tax and price increases are particularly effective in reducing the number of pregnant women who smoke. Because maternal smoking is a preventable cause of low birth weight, sudden infant death syndrome, ectopic pregnancy, spontaneous abortion, and neonatal mortality, the resulting reductions in smoking reduce these health complications and should result in health care cost savings (Evans and Ringel, 1999; Ringel and Evans, 2001; Colman et al., 2003).
Efforts to reduce smoking among pregnant women gained urgency with the release of the 2001 Surgeon Generals report on smoking among women (DHHS, 2001). The report concluded that smoking during pregnancy causes numerous complications, including increased risks for ectopic pregnancy, spontaneous abortion, premature rupture of membranes, separation of the placenta from the uterus, abnormal location of the placenta, and premature delivery. These complications can result in stillbirth, or place the babies at greater risk of dying, either at birth, or in the months that follow.
Multiple studies conclude that increases in cigarette taxes and prices result in significant reductions in the prevalence of smoking among pregnant women. The following are among some of the findings:
- A 10 percent increase in cigarette prices would reduce pregnant womens smoking prevalence by about 5 percent (Evans and Ringel 1999, using data from the 1989 through 1992 Natality Detail files).
- A 10 percent price increase would reduce prevalence of smoking among pregnant women by up to 7 percent, in nearly all subgroups of the population of pregnant women, including those defined by marital status, race/ethnicity, age, and those with relatively high smoking rates; the researchers also found that nearly all subgroups are more responsive to price than the general adult population (Ringel and Evans, 2001, updating their analysis using data through 1995).
- A 55-cent increase in cigarette excise taxes would have reduced maternal smoking prevalence by about 22 percent (Ringel and Evans, 2001).
- A 10 percent increase in cigarette taxes increases the probability of a woman quitting smoking during pregnancy by 10 percent (Colman et al., 2003, using data from the Pregnancy Risk Assessment Monitoring System in 10 states from 1993 through 1999).
Given the health consequences of smoking during pregnancy, tax- and price-induced reductions in maternal smoking can significantly improve birth outcomes. Evans and Ringel (1999), for example, show that higher cigarette taxes lead to increases in average birth weight. They estimate that a $1.10 tax increase that would have reduced smoking prevalence among pregnant women by 32 percent would also have reduced the probability of a low birth weight birth by 5 percent.
- Cigarette smoking among individuals with low incomes is more responsive to price than is cigarette smoking among people with high incomes. Given the relatively high prevalence of smoking in low-income populations, this greater price sensitivity suggests that increases in cigarette taxes and prices can be particularly effective in reducing disparities in the burden of disease caused by tobacco use (CDC, 2008; Murray et al., 2006; Farrelly et al., 2001; Ross and Chaloupka, 2006; Townsend et al., 1994).
People with lower incomes are more likely to smoke and to die from causes related to smoking (CDC, 2008; Murray, et al., 2006); but other researchers found that they are also more likely to respond to price increases (Farrelly et al, 2001). These findings suggest that increases in cigarette excise taxes can be highly effective in reducing observed disparities in the health consequences caused by tobacco use.
Moreover, while the burden of existing cigarette excise taxes falls most heavily on lower-income smokers, their greater sensitivity to price increases suggests that higher taxes will lead to greater reductions in smoking among people with lower incomes than among those with higher earnings. One study reported that individuals living below the median income level were about four times more responsive to price increases than were those with higher incomes (Farrelly et al., 2001). These conclusions have been supported by other studies that examined differences among groups based on socioeconomic status and educational attainment, as well as studies that reported on the impact of price on smoking in low-, middle-, and high-income countries (Ross and Chaloupka, 2006).
The conclusions of these and other studies imply that increases in cigarette and other tobacco product taxes will lead to disproportionate reductions in tobacco use among low-income persons, which may at least partially reduce the regressivity of taxes on tobacco products.
When considered in the context of the broader fiscal system, the impact on low-income communities can be reduced further if the revenues generated from increased cigarette taxes are used to expand access to health care, or to prevent or treat addiction to tobacco (e.g., Medicaid coverage of smoking cessation counseling and pharmacotherapies).
- In addition to having an impact on public health impact, increases in cigarette excise taxes have a positive impact on revenues, despite reductions in the sale of cigarettes and any losses due to increased tax evasion and avoidance (Farrelly et al., 2003; Lindblom and McMahon, 2006; Stehr, 2005; Merriman et al., 2000; Hyland et al., 2006; Chaloupka et al., in press).
Cigarette taxes account for only a portion of cigarette prices (less than half, on average), and researchers have found that although increased taxes lead to significant reductions in the number of cigarettes sold, revenues increase because of the higher tax on remaining sales. In fact, a recent analysis of state cigarette excise tax increases and revenues suggests that every state that raised its cigarette tax by ten cents or more between 1990 and 2000 saw increases in the revenues from these taxes, despite the reductions in cigarette sales caused by the tax increase (Farrelly et al., 2003).
In contrast, states that allowed inflation to erode the value of their cigarette taxes saw a decline in the inflation-adjusted value of their cigarette tax revenues. A second study, of tax increases between January 2002 and July 2003, similarly reported that every increase led to an increase in cigarette tax revenues (Lindblom and McMahon, 2006).
Smokers try to avoid tax increases by purchasing cigarettes on-line or in jurisdictions with lower taxes or no taxes at all. These efforts partially offset the public health benefits of cigarette tax increases, as do the more organized efforts to smuggle cigarettes. Recent estimates suggest that these tax avoidance and evasion activities were a factor in one-eighth or more of total cigarette consumption in the early 2000s (Stehr, 2005). Even in the presence of these activities, however, increases in cigarette taxes are effective in reducing cigarette smoking, improving public health, and generating new revenues (Farrelly et al., 2003; Merriman et al., 2000). Among the other findings:
- Heavier smokers and those with higher incomes are more likely to engage in tax avoidance than are other smokers, while smokers who purchase low-tax or untaxed cigarettes are less likely to try to quit smoking (Hyland et al., 2006).
- States have taken a number of actions to address tax avoidance and evasion over the last few years, and appear to be making progress (Chaloupka et al., in press).
- The response of tobacco companies to higher taxes can in part determine how the taxes impact tobacco use, the health consequences of tobacco, and the amount of revenue generated through the sale of tobacco products. If tobacco companies increase their use of price promotions, for example, they can partially offset the effect of tax increases on price. Research clearly demonstrates that tobacco use declines following tax increases, despite these potentially offsetting factors (Chaloupka et al., 2002; Loomis et al., 2006; Slater et al., 2001; Keeler et al., 2004; Pierce et al., 2005; FTC, 2007).
While cigarette and other tobacco product prices are affected by many factors, research indicates that increases in excise taxes result in comparable (and at times larger) increases in retail cigarette prices. However, tobacco company marketing practices can, at times, partially offset the impact of tax increases on the price smokers pay for cigarettes.
As seen in the marketing expenditure data reported annually by the Federal Trade Commission (FTC, 2007), the amount tobacco companies spend on these marketing efforts has increased dramatically over the past two decades. Evidence from internal tobacco company documents suggests that at least part of the increase reflects the cigarette companies efforts to soften the impact of cigarette tax increases (Chaloupka et al., 2002).
A recent study using scanner data on cigarette sales from 1994 through 2003 provides additional evidence that this is the case (Loomis et al., 2006). The researchers noted that the proportion of cigarettes sold under some type of point-of-sale promotion has increased sharply over time and that these increases occurred during periods of sustained cigarette tax increases, as well as the price increases that followed the Master Settlement Agreement.
Other researchers have found that these promotions are more prevalent in states with comprehensive tobacco control programs (Slater et al., 2001). Increases in marketing expenditures following the Master Settlement Agreement succeeded in offsetting between 33 and 57 percent of the effect on consumption of the price increases that followed the agreement (Keeler et al., 2004). Another study found that promotions that effectively bring down prices can partially offset the effectiveness of tax increases as a tool for preventing youth from starting to smoke (Pierce et al., 2005).
- Increases in cigarette taxes and the resulting decline in tobacco use do not cause significant job loss (Liang et al., 2006; Warner and Fulton, 1994; Warner et al., 1996).
Tobacco growing and tobacco product manufacturing account for a small and declining share of economic activity in the United States, with most concentrated in the states of Kentucky, North Carolina, and Virginia (Liang, et al., 2006). Studies suggest that the economic presence of tobacco does not imply an economic dependence on tobacco. As cigarette smoking and the use of other tobacco products decline in response to higher taxes or other tobacco control efforts, the money spent on these products does not disappear from the economy but is instead spent on other goods and services, creating new jobs that offset lost employment in the tobacco sector.
Warner and Fulton (1994) were the first to carefully examine the net economic impact of reductions in tobacco use. Using a relatively sophisticated macroeconomic model, they simulated the impact of decreased tobacco use on employment and income in Michigan, assuming that reduced spending on tobacco products would be allocated to spending on other goods and services following existing consumer spending patterns in Michigan. Under a variety of scenarios, the researchers found a net positive economic impact in Michigan, resulting in new jobs and raising average incomes. Using a similar approach, Warner et al. reported on the impact of reduced tobacco use on the regional economies of the United States (Warner et al., 1996). They concluded that further declines in tobacco use would lead to a net increase in jobs in all non-tobacco-growing regions that would more than offset the relatively small decline in jobs in the tobacco-growing region.