Effects of State Sales taxes on cigarette consumption

1
Effects of State Sales taxes on cigarette
consumption

• By
• James Wicker
• Jeff Malone and Kyle Freeborn

2
Introduction
3
Introduction

• Alfred Marshall (1920) "Whether a commodity
  conforms to
• the law of diminishing or increasing return, the
  increase in
• consumption arising from a fall in price is
  gradual and,
• further, habits which have once grown up around
  the use of a
• commodity when its price is low are not quickly
  abandoned
• when its price rises again
• Thomas Schelling (1978) describing a smoker who
  wants
• to kick the habit "Everybody behaves like two
  people, one
• who wants clean lungs and long life and another
  who
• adores tobacco.... The two are in a continual
  contest for
• control the 'straight' one often in command most
  of the
• time, but the wayward one needing only to get
  occasional
• control to spoil the other's best laid plan."

4
Introduction

• Numerous studies have observed that cigarette
  consumption decreases when the price of
  cigarettes increases. Although cigarette tax
  increases have generally been enacted to raise
  revenues, such tax increases have raised the
  price of cigarettes and are believed to have led
  to reductions in cigarette consumption.
• We evaluated the effect of state cigarette tax on
  consumption in the 48 states for the years 1985
  and 1995. In this context, we undertook the
  present study to assess changes in cigarette
  consumption following state cigarette tax and to
  quantify the amount of the change in cigarette
  consumption by the amount of cigarette packs sold.

5
Previous Research

• AMERICAN LUNG ASSOCIATION
• EPIDEMIOLOGY AND STATISTICS UNIT
• RESEARCH AND SCIENTIFIC AFFAIRS
• NOVEMBER 2004
• Mortality
• Consumption
• Prevalence of Tobacco Use and Cessation
• Tobacco Advertising and Promotion
• State Laws and Environmental Tobacco Smoke
• International Smoking Prevalence
• The year 1991 was the first in more than 25 years
  of observation that more than half of the U.S.
  adult population was non smokers or had smoked
  less than 100 cigarettes. Specifically, most
  women, blacks, Hispanics, and persons with a
  college degree had never smoked. Continuing this
  trend is important because preventing smoking
  initiation is an important way to reduce
  smoking-attributable mortality.
• For U.S. males, smoking prevalence peaked in the
  1940s and 1950s at approximately 67. For
  females, smoking prevalence peaked in the 1960s
  at about 44. In the past 25 years the gap
  between men and women smoking rates has
  decreased. In 1965, 51.9 of men and 33.9 of
  women were cigarette smokers in contrast in
  2002, 25.2 of men and 20 of women smoked.

6
Previous Research

• Health and medical experts agree that we must
  discourage children from starting to smoke and
  becoming addicted if we are to control the
  tobacco-disease epidemic. Cigarette advertising
  and promotion campaigns may have influenced
  initiation in these groups. Tobacco advertising
  glamorizes and legitimizes tobacco usage,
  increasing social and peer pressure among young
  people to use to be accepted and creating the
  false impression that tobacco products pose no
  significant health risk. Additionally the tobacco
  industry aggressively and consistently fights
  meaningful efforts at the federal, state and
  local levels to enact and enforce sales to minors
  laws.
• Although most smokers in the U.S. report that
  they want to stop smoking, more than 45.8 million
  adults continue to smoke as of 2002. To sustain
  the decline in smoking prevalence, efforts must
  be intensified to discourage initiation and to
  promote cessation. Measures for promoting
  cessation and reducing the prevalence of smoking
  include tobacco excise taxes, enforcing minor
  access laws, restricting smoking in public places
  and restricting tobacco advertising and
  promotion.
• http//www.lungusa.org/atf/cf/7B7A8D42C2-FCCA-460
  4-8ADE-7F5D5E7622567D/SMK1.PDF

7
Economic Model

• Standard, constrained, lifetime
  utility-maximizing
• framework of economics
• U(t) f C(t), X(t)
• C(t) - consumption of addictive substance at time
  t
• X(t) - consumption of composite good at time t

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Economic Model

• maximize utility function subject to income
  constraint
• Produces demand function of the type
• C(t) g P(t), Y(t), Z(t)
• P(t) - current price of addictive substance
• Y(t) - income
• Z(t) - vector of variables reflecting tastes

9
Economic Model

• Comments on Conventional Approach
• Current consumption of addictive substance
  depends only on current factors
• Increase in current price will reduce current
  consumption (price defined broadly to include
  monetary
• price, time costs, expected legal costs, and
  anticipated health consequences)
• C(t) gP(t), Y(t),
• we are holding all other variables constant
  because there is no data present for it.

10
Data

• Cigarette Consumption Data Set
• This data set includes observations for 48 states
  for two years (1985 and 1995) for the following
  variables
• Year 1985 or 1995. The data is stacked first
  listing the 48 observations for 1985 and then
  showing the 48 observations for 1995.
• CPI the consumer price index for the state for
  that year
• Pop the state population for that year
• Packpc packs of cigarettes sold per year on a
  per capita basic. For example, in 1985 the
  average person smoked about 122 packs of
  cigarettes per year. By 1995 this had fallen to
  about 96.
• Income State personal income (total, nominal)
• Tax Average state, fed, and local excise taxes

11
Data

• Avgprs Average price per pack including sales
  tax
• Taxs average excise taxes for fiscal year.
  Including sales taxes
• Incpc nominal income per capita
• Lpackpc the log of (packpc)
• Lavgprs the log of (avegprs)
• Lincpc the log of income per capita

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Data - 1985
13
Data - 1995
14
Results

• Price Elasticity -P x dQ
• Q dP
• Beta
• 1985
• -103.65 x -1.15842 -0.983
  slightly inelastic
• 
  122.04
• 1995
• -183.25 x -0.5769665 -1.098
  slightly elastic
• 
  96.33

15
Results - 1985

• -103.65 x -1.15842 -0.983
• 122.04
• slightly inelastic
• 
  
• ln Avgprs -0.987
• ln Packpc
• Slightly inelastic

16
Results - 1995

• -183.25 x -0.5769665 -1.098
• 96.33
• slightly elastic
• 
  
• ln Avgprs -1.11
• ln Packpc
• Slightly elastic

17
Results

• State Cigarette tax increases were associated
  with an average decline in cigarette consumption.
• The graphs shows that from 1985 to 1995 average
  price per pack increased and packs per capita
  decreased.

18
Results

• Our results are consistent with the econometric
  literature on cigarettes, in which estimated
  price elasticity for cigarettes (the percentage
  change in sales as a result of a 1 change in
  price) has ranged from -0.14 to -1.44 depending
  on the methods used and the populations studied.
  Reviewing this literature, the surgeon general's
  1989 report used -0.47 as an estimate of the
  price elasticity for the general population. 2
• In our study, using a rough conversion from our
  tax-response format to an elasticity format, we
  found an elasticity of -0.983 for 1985 and -1.098
  for 1995 ( a 1 increase in average price will
  cause a -0.98 drop in packs per capita for 1985
  and -1.10 drop in packs per capita for 1995).
• Despite the strong and consistent relationship
  observed, it could be argued that changing public
  opinion regarding smoking precedes and causes
  both a tax increase and a decrease in cigarette
  sales. Though previous research finds that this
  hypothesis seems unlikely, as the same
  relationship between tax increases and declines
  in cigarette sales even in the first period of
  the analysis, 1955 through 1964, a period before
  the surgeon general's first report and a time
  when little antismoking sentiment existed.
• We have used an epidemiologic approach to
  evaluate the effect of a state based public
  health intervention-the enactment of cigarette
  excise tax increases. Our results provide further
  evidence that state tax increases are effective
  in reducing smoking and that the larger the tax
  increase, the larger the drop in cigarette
  smoking.

19
Shortcomings

• Increase in past price and/or anticipated
  increase in future price will have no impact on
  current consumption.
• Our model does not reflect the dependence of
  current consumption decisions on past behavior
  that characterizes the use of an addictive
  substance.
• While our approach is conceptually easy to
  understand, it is limited in that we were not
  able to control for potential biases such as the
  interaction of taxes and clean indoor air acts.
• Our data does not reflect any changes between
  1985 and 1995.
• As mentioned before, the range of data for 1985
  is very clustered because the price and quantity
  of packs sold were very similar throughout the
  states of observation. This might have caused the
  graph for 1985 to show a trend that otherwise
  does not exist compared to the data.

20
References

• 1. Google video, Tvdays.com
• 2. US Department of Health and Human Services.
  Reducing the Health Consequences of Smolang 25
  Years of Progress. A Report of the Surgeon
  General Washington, DC US Department of Health
  and Human Services Public Health Service
  Centers for Disease Control Center for Chronic
  Disease Prevention and Health Promotion Office
  on Smoking and Health 1989 DHHS publication no.
  (CDC) 89-8411.