Tobacco Policy: Economic Myths and Realities

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TC Online Presentations
www.tobaccocontrol.com
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Economics of TobaccoMyths and Realities

• Kenneth E. Warner, PhD
• Avedis Donabedian Distinguished University
  Professor of Public Health
• University of Michigan, USA
• November 7, 2002

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Key to the myths

• TI tobacco industry myth
• TC tobacco control community myth

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Myth 1 (TI)(the industrys favorite)

• Tobacco is crucial to the economy. Without
  tobacco growing, cigarette manufacturing, and
  distribution and sale of tobacco products, a
  states or countrys economy will suffer job
  losses, falling tax revenues, and growing trade
  deficits.

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When and how the myth is used

• Whenever governments consider policy that would
  discourage tobacco consumptionespecially in
  non-tobacco states and countries.
• Intent to frighten officials into believing
  that, regardless of their health benefits,
  tobacco control measures would exact a huge
  economic toll.

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Message

• If government adopts policy x, cigarette sales
  will drop.
• People will lose jobs as a consequence (tobacco
  farmers, manufacturing plant employees,
  wholesalers, retail clerks).
• The economy will suffer from lost tax revenues,
  including (where appropriate) income and sales
  taxes associated with reduced spending by the
  newly unemployed.

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Reality...

• A significant economic presence does not imply
  significant economic dependence.
• Spending on tobacco is rarely important to an
  economy.
• Money not spent on tobacco will be spent on
  other goods and services instead, thereby
  creating a comparable number of jobs.

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• Real costs costs of transition to alternative
  products.
• Given the addictiveness of tobacco, the
  transition necessarily occurs very slowly
  (cigarette consumption declining 1-2 per year in
  developed countries).

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Case studies

• In Michigan, a non-tobacco state, employment
  increases as tobacco consumption declines.
  Warner and Fulton, JAMA, 1994
• In the U.S., employment would rise in all 8
  non-tobacco regions (44 states) if tobacco
  consumption fell. Warner et al., JAMA, 1996
• Only in the 6-state tobacco bloc would employment
  fall, and by a tiny fraction of state employment.
  
• Employment gains in Scotland, UK, South Africa,
  and Bangladesh falls in Canada and Zimbabwe.
  Jacobs et al., Ch. 13 in Jha and Chaloupka,
  eds., Tobacco Control in Developing Countries
  (Oxford, 2000)

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Principal transitional costin tobacco states and
countries

• Tobacco farmers not be thrown out of work.
• Rather, fewer children of tobacco farmers would
  go into tobacco farming.
• Schelling, Preventive Medicine, 1986

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An additional economic benefit of reduced
spending on tobacco

• Savings will accrue in health care spending, fire
  fighting, equipment maintenance and cleaning, etc.

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Myth 2 (TC)(tobacco control communitys
favorite)

• Tobacco imposes an enormous health care cost on
  society. Decreasing smoking will save billions
  of dollars in smoking-produced health care costs
  each year.

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When and how the myth is used

• Whenever governments consider policy that would
  discourage tobacco use.
• Intent to convince officials that the policy
  would produce major economic benefits at the same
  time that it benefits the publics health.

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Reality...

• Smoking-produced illness does account for a
  significant share of health care costs, e.g.,
  approximately 12 in the U.S. Miller et al.,
  Public Health Rep, 1998
• However, in the absence of smoking, the elderly
  population would grow, as would old-age chronic
  disease costs.

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Net impact

• On balance, costs likely would fall, but only
  modestly. Net savings would be small. Warner
  et al., Tobacco Control, 1999
• TC community should stick to the real reason to
  combat smoking its devastating health effects.

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Myth 3 (TI)

• A large tax increase is dangerous because it
  will reduce government revenues by decreasing
  legal cigarette sales. This will result due to
  decreased smoking and increased smuggling of
  lower-priced cigarettes from neighboring states
  or countries.

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When and how the myth is used

• Whenever governments consider a cigarette excise
  tax increase.
• Intent to frighten officials into believing
  that a policy intended to increase revenue will
  do the opposite, and that it will introduce
  organized crime into the state or country.

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Reality,with regard to cigarette sales...

• Cigarette taxation will reduce cigarette sales.
• Increasing price is the most effective means of
  decreasing cigarette smoking, especially among
  children.
• 10 price increase will decrease cigarette
  consumption 4 in developed countries, 8 in
  developing countries.
• Smoking among children will fall by about twice
  as much. Chaloupka et al., Ch. 10 in Jha and
  Chaloupka, 2000

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Real cigarette prices per capita consumption
US, 1970-2000
3100
180
2900
160
2700
140
2500
Cigarettes per capita
Price (1982/84 cents)
2300
120
2100
100
1900
80
1700
1500
60
1970
1975
1980
1985
1990
1995
2000
Year
consumption
price
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Reality with regard to revenues...

• Increased taxes invariably increase government
  revenues.
• The percentage decline in cigarette consumption
  is smaller than the percentage increase in price
  that induces it.
• Further, tax is only a fraction of price, so a
  given tax increase will cause a far smaller
  decrease in cigarette sales.

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Federal cigarette tax rate cigarette tax
revenue in the US
0.30
7
6.5
1960-2000
0.25
(1982/84 cents)
6
5.5
(billions of 1982/84 )
0.20
5
0.15
4.5
Real cigarette tax rate per pack
4
0.10
3.5
3
0.05
Real cigarette tax revenue
2.5
0.00
2
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Year
Cigarette tax rate
Cigarette tax renenue
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Reality with regard to smuggling...

• Function of many forces
• Price but one.
• Others likely far more important
• a states or countrys general tolerance for
  corruption
• its specific efforts to combat smuggling (use of
  unique tax stamps, enforcement, etc.).
• Informal cross-border purchases (buttlegging)
  accounts for a small share of in-state tax
  avoidance.
• Joossens and Raw, BMJ, 2000

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Myth 4 (TI)

• Even if a tax increase would raise government
  revenues and decrease smoking, it is
  fundamentally unfair because its burden would
  fall disproportionately on the poor.

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When and how the myth is used

• Whenever governments consider a cigarette excise
  tax increase.
• Intent to appeal to officials concern for the
  welfare of the least privileged in society, and
  to their basic sense of fairness.

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Reality...

• Cigarette taxes are regressive.
• A larger proportion of the poor smoke.
• However, a tax increase may produce a progressive
  impact
• because the rich decrease their smoking only
  slightly in response to a price increase
• the poor decrease theirs substantially.
• Townsend et al., BMJ, 1994

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Furthermore...

• Health benefit of a tax increase is distinctly
  progressive.
• States and countries can compensate in part for
  any tax regressivity
• e.g., by funding cessation services and
  pharmaceuticals for poor smokers.