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).