Some economics of tobacco regulation

Cigarette smoking in the United States is implicated in about 480,000 deaths each year – about one in five deaths. Cigarette smokers lose on average about 10 years of their life expectancy. According to the US Surgeon General’s report in 2020:

Tobacco use remains the number one cause of preventable disease, disability, and death in the United States. Nearly 34 million American adults currently smoke cigarettes, most of them smoke daily. Nearly all adult smokers have smoked since their teens. More than two-thirds of smokers say they want to quit, and every day thousands try to quit. But because the nicotine in cigarettes is highly addictive, it takes most smokers multiple attempts to quit for good.

Philip Dikica, Donald Kinkel, and Michael F. Lowenheim Evidence on “The Economics of Tobacco Regulation: A Comprehensive Review” (Journal of Economic Literature, September 2022, 883-970). Of course, I can’t do justice to their work in a blog post, but here are a few that caught my eye.

  1. US efforts to regulate smoking changed dramatically in the late 1990s, with a huge jump in cigarette taxes and restrictions on smoking.

For example, here’s a figure showing the combined federal and state tax rate on cigarettes as a percentage of the price (solid line) and as a price per pack (dashed line). Either way, it shows a sharp rise from roughly 1996 through 2008.

In addition, the smoking ban has increased significantly.

Governments around the world have implemented smoking bans sporadically over the past five decades, but they have become more widespread over the past two decades. … [W]Smoke-free indoor air laws at the Orc Place venue, bar and restaurant are becoming increasingly popular. As of 2000, no country has yet issued a comprehensive ban on smoking in these areas, although some states have more targeted bans. From 2000 to 2009, the proportion of the US population covered by smoke-free workplace laws increased from 3 percent to 54 percent, and the proportion covered by smoke-free restaurant laws increased from 13 percent to 63 percent… since the beginning of century, the increase in taxes and regulation on cigarettes and tobacco is unprecedented and dramatic.

2. Because tobacco use is discouraged in many different ways, all at the same time, it is difficult for researchers to sort out individual effects, for example, cigarette taxes versus workplace smoking bans versus government-imposed health warnings versus changing levels of social consent.

3. My previous understanding of conventional wisdom was that the demand for cigarettes by adult smokers was relatively inelastic, while the demand from younger smokers was relatively inelastic. The basic belief was that adult smokers (as a group) had a longer-term smoking habit and had more income, so it was more difficult for them to kick their tobacco habit, while the tobacco use of younger smokers is more flexible. This conventional wisdom may need some tweaks.

The consensus from the most recent comprehensive review of research done 20 years ago (Chaloupka and Warner 2000) is that the demand for cigarettes for adults is inelastic.
Recent research from a time when there were much higher cigarette taxes and lower smoking rates supports this consensus, however, there is also evidence that
Methods for estimating cigarette price response overestimated price elasticity
the demand. In addition, recent research casts doubt on the preconceived consensus of young people
The demand for smoking is more price elastic than that of adults; The most reliable studies
Youth smoking indicates a weak relationship between smoking initiation and cigarettes
taxes. The inflexible nature of cigarette demand indicates that cigarette sales taxes are an effective income-generating tool.

In other words, high cigarette taxes do a decent role in revenue collection, but do little to discourage smoking.

4) If cigarette taxes are really about revenue collection, because they do little to discourage smoking, it is critical that people with lower incomes tend to smoke more, and thus end up paying more cigarette taxes. This figure shows cigarette use by income group; The following figure shows cigarette taxes paid by income category.

5) In general, there are two economic justifications for cigarette taxes. One is what economists call “externalities,” the costs that cigarette smokers impose on others in ways that include secondhand smoke and higher health care costs that are shared across public and private health insurance plans with nonsmokers. The other is the “insides”, the costs that smokers who want to quit but find themselves trapped by nicotine supplementation impose on themselves. The authors write:

However, evidence of the magnitude of smoking-induced externalities does not necessarily support current tax levels. Behavioral welfare economics research indicates that the endogenous factors of smoking provide potentially stronger reasons for higher taxes and stronger regulations. But the empirical evidence for intrinsic amounts of smoking is surprisingly weak.

6) Finally, reading the article, I find myself wondering if the United States is, to some extent, replacing marijuana with tobacco cigarettes. As the authors point out, the few detailed research studies on this topic have found no such link. However, from a big picture perspective, the trend line for cigarette use is definitely going down over time, while the trend line for marijuana use is going up. A recent Gallup poll reported that “more people in the United States now smoke marijuana than cigarettes.” Evidence from the National Survey on Drug Use and Health does not support this claim:[m}orepeopleintheUSarenowsmokingmarijuanathancigarettes”EvidencefromtheNationalSurveyonDrugUseandHealthdoesn’tmore-or-lessbacksupthatclaim:[m}orepeopleintheUSarenowsmokingmarijuanathancigarettes”EvidencefromtheNationalSurveyonDrugUseandHealthdoesn’tmore-or-lessbacksupthatclaim:

Among people aged 12 or older in 2020, 20.7 percent (or 57.3 million people) used tobacco products or used an e-cigarette or other electronic vaping device to smoke nicotine in
Last month. … In 2020, marijuana was the most used illicit drug, with 17.9 percent of people 12 years of age or older (or 49.6 million people) using it in the past year. The
The highest percentage was among young adults aged 18-25 (34.5 percent or 11.6 million people), followed by adults aged 26 or older (16.3 percent or 35.5 million people)
people), then adolescents aged 12 to 17 (10.1 percent or 2.5 million people).

However, about one-fifth of tobacco product users do not smoke cigarettes, and with this adjustment, cigarette smoking would be slightly less than total marijuana use.

For those who would like more information regarding smoking, here are some previous posts:

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