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Increasing Tobacco Taxes: A Powerful Weapon for Reducing
the Burden of Tobacco
“Of all the concerns,
there is one—taxation—that alarms us the most.
While marketing restrictions and public and passive smoking
do depress volume, in our experience taxation depresses it
much more severely. Our concern for taxation is, therefore,
central to our thinking about smoking and health.”
~ Phillip Morris Internal Document
“Increases in taxation,
which reduce consumption, may mean the destruction of the
vitality of the tobacco industry.”
~ British American Tobacco
Background
Raising the prices of tobacco products is a proven way of
reducing tobacco use. Price
hikes both encourage cessation and thwart initiation.
6, 13, 22 Also, higher prices have the added benefit of reducing
use among people not yet addicted to nicotine, including young
people, whose level of tobacco consumption is more sensitive
to price. 2, 5, 8, 12
Depending on a state’s readiness, various approaches
can be used to increase taxes. These include voter initiatives,
legislative initiatives, developing partnerships, and dedicated
tax approaches. A number of states have been successful in
creating tobacco control tax initiatives. Click the state’s
name to read their stories:
The Theory of Economics and Tobacco Control
Why is it important to understand the theory of economics?
Because understanding the impact of economics provides a strong
foundation for developing effective tobacco control policies.
In the past, economic models either ignored addiction or treated
it as an irrational behavior--not subject to basic laws of
economics. Thus, many assumed that higher prices for an addictive
product would not reduce its consumption. However, over the
past few decades, economists have studied addictive behaviors,
including smoking, using theoretical and empirical models.
These models reason that individuals’ choices are not
consistent over their life-cycle. For example, people may
prefer to smoke at one age with the intention of quitting
later, but then change their mind later in life. The reality,
however, is that most addictions begin in adolescence, and
young people have, at best, a limited understanding of addiction.
Economic models of addiction apply to cigarette smoking and
other tobacco use. Using economic models can help in understanding
the impact of prices and tobacco control policies on individuals’
smoking behavior. These include their decisions to start,
continue, reduce, quit, or re-start smoking. However, understanding
economic models can be difficult and assumes some knowledge
of economics. For a detailed examination of economic models
of tobacco use and addiction, click
here.
A Brief Overview of Economics and Tobacco Use
For decades, research has been conducted to estimate the
impact of price on cigarette smoking. This research clearly
demonstrates that changes in cigarette prices,
by increasing cigarette taxes, manufacturers’ prices,
and/or other factors, leads
to changes in cigarette smoking 17.
This can be explained using the most basic law of economics
called the downward sloping demand curve.
This law states that:
- As the price of a product rises, the amount used of
that product falls, and that as the price of a product falls,
the amount used of that product rises.
Thus, the reduction in smoking that occurs from price increases
is the result of decreases in both (1) the number of smokers
and (2) the amount of cigarettes used by smokers.
- A change in the number of smokers can occur in
a variety of ways: a) smoking cessation, b) initiation,
and c) reinitiation.
- Also, youth smoking is more sensitive to price than adult
smoking. Research has found that teen smoking is up
to three times more sensitive to price than adult smoking.
5, 8
Furthermore, because of the addictive nature of cigarette
smoking, not all smokers initially will stop due to a tax
increase. However, in the long run, more smokers will cut
down or stop due to the increase in price. http://tigger.uic.edu/~fjc/Presentations/Papers/taxes_consump_rev.pdf
http://tigger.uic.edu/~fjc/Presentations/Papers/hsap_policy9.pdf
Point/Counterpoint or Pros and Cons of Raising Tobacco Taxes
Tobacco is a uniquely dangerous product. It is the only legally
available consumer product that kills when used precisely
as intended. Therefore, Public Health should use all the tools
at its disposal to reduce the consumption of tobacco. But,
the Tobacco Industry provides fierce opposition to such measures
as increased taxes. A few familiar Tobacco Industry (point)
and Public Health (counterpoint) arguments include:
Tobacco Industry Argument:
- Excise tax increases will discourage smoking and thereby
reduce government revenues.
Public Health Argument:
- Raising tobacco taxes, no matter how large the increase,
has never once led to a decrease in cigarette tax revenues.
http://tobaccofreekids.org/research/factsheets/pdf/0098.pdf
- When cigarette taxes are increased, fewer young people
take up smoking; light and moderate smokers tend to quit;
but most heavy smokers continue to smoke and to buy cigarettes.
This keeps tax revenues high.
http://tigger.uic.edu/~fjc/Presentations/Papers/taxes_consump_rev.pdf
- Some of the money saved by quitters will be spent on other
goods that are also taxed.
- Raising tobacco taxes is not an unpopular move. Studies
from several countries show that most people--smokers and
non-smokers--support increased tobacco tax as a means of
preventing young people from taking up the habit.
Tobacco Industry Argument:
- Higher taxes are unfair because they target the poorer
members of society more harshly.
Public Health Argument:
- It’s the tobacco industry that chooses to target
poor consumers, who are often less responsive to health
messages than the better educated and better off; this argument
is hypocritical at best. Lower income and minority smokers
are more likely than other smokers to be encouraged to quit
in response to a price increase and thus would obtain health
benefits attributable to quitting. 17
http://www.cdc.gov/tobacco/research_data/spec_pop/mmwr798.htm
- Failure to raise tobacco taxes out of concern for the
welfare of the poor simply makes it easier for the tobacco
industry to condemn another generation to addiction to tobacco.
Tobacco Industry Argument:
- The tobacco industry falsely argues that cigarette tax
increases will create enormous surges in cigarette smuggling
and smoker efforts to evade the higher taxes through cross-border
or Internet cigarette purchases.
Public Health Argument:
- Research shows the cigarette smuggling and tax avoidance
are minor problems.
http://www.advocacy.org/publications/mtc/priceincreases.htm
- A recent study on cigarette smuggling found that cigarette
smuggling and cross-border cigarette purchases account for
no more than about five percent of all cigarette sales.
Smuggling is a problem related to weak or ineffective laws
and governments can adopt effective policies to control
smuggling and unlawful Internet sales. 14
The key elements of an effective tobacco tax policy are:
- Significant increases in the tax on tobacco.
To be significant, the tax increase should raise the price
of tobacco by more than the growth in the cost of earnings
(i.e., the cost of living) to make tobacco less affordable.
http://tigger.uic.edu/~fjc/Presentations/Papers/taxes_consump_rev.pdf
- Regular increases in the tax on tobacco.
A significant tax increase will reduce consumption in the
short term. But, over time, inflation and rising living
standards will wear down the effect. So tax increases must
be regular to avoid that. One way to do this is to provide
for automatic increases that keep pace at least with increases
in the consumer price index.
http://tobaccofreekids.org/campaign/global/docs/prices.pdf
- A structure of tobacco taxes that reinforces health
policy objectives. This means the structure should
minimize loopholes (e.g., by taxing roll-your-own tobacco
on the same basis as cigarettes to avoid giving people a
price incentive to switch rather than quit).
http://www1.worldbank.org/tobacco/pdf/Taxes.pdf
First Steps
Engage local and statewide key leaders and decision
makers in developing and implementing a strategic plan for
increasing tobacco taxes (e.g., volunteers, staff,
elected officials, health care professionals, business leaders,
etc). Use the following goals to guide your efforts.
Define objective of the tax:
- For public health reasons (e.g., reduce death and illness
related to tobacco use) 18
http://www.cdc.gov/mmwr/PDF/wk/mm5040.pdf
- For fiscal reasons. Tobacco taxes are a very efficient
way to raise revenue. And the enforcement and collection
of these taxes is easier than for other taxes, such as those
based on income. 14, 16
- To correct for “externalities” (e.g., defray
the external costs of tobacco use, such as diseases contracted
by non-smokers and the costs to treat such diseases).
http://www1.worldbank.org/tobacco/pdf/Taxes.pdf
- To discourage use of tobacco (e.g., Encourage smokers
to quit or reduce their smoking, discourage ex-smokers from
starting again, deter non-smokers from starting). 16, 18
- To protect children and young adults. Create a cycle whereby:
increased tobacco taxes raise cigarette prices which,
(given the limited income of the youth, makes cigarettes
more expensive to purchase, leading to an increase in the
average age at which someone does start to smoke), which
leads to a lower total use of tobacco, which leads
to lower future health care costs, deaths and diseases.21
Determine the tax rate:
Evaluate the short- and long-term impact of increases to
tobacco taxes:
- To reduce youth and adult smoking and maintain this decreased
usage over time, the cigarette price increase must be sustained
in real terms, (i.e., adjusted for inflation). If the price
increases are not sustained in inflation-adjusted terms,
then inflation will eventually wear down the value of the
price increase. Thus, smaller reductions in cigarette smoking
would be achieved. [http://www.globalink.org/tobacco/fact_sheets/04fact.htm
http://tigger.uic.edu/~fjc/Presentations/Scans/Final
PDFs/tc407to426.pdf]
- The short- and long-term economic and health benefits
of increasing tobacco taxes vary. The long-term increases
in revenues from large tax increases will be smaller than
the short-term increases. However, the long-term decreases
in cigarette smoking and the health benefits will be larger
than the short-term decreases. This means that lower rates
of use today due to price increases will lead to even greater
reductions in the future. In essence, the long run impact
of price on smoking is about double the short run impact.
[Lightwood, et al.,
http://tigger.uic.edu/~fjc/Presentations/Scans/Final
PDFs/tc063to104.pdf]
Summary:
Tobacco taxes are the single most effective public health
choice for reducing the harmful effects from tobacco use.
Higher tobacco taxes will significantly reduce cigarette smoking
and other tobacco use. However, for tobacco tax increases
to have their maximum effect on use, the increase must be
sustained. In addition, similar increases in the taxes on
all tobacco products are needed to maximize the health benefits
of a tobacco tax increase. When combined with other tobacco
control initiatives, even larger reductions can be achieved.
Points to Remember:
- For tobacco tax increases to have their maximum impact
on use, the increase must be sustained.
- Due to substitution among other tobacco products, similar
increases in the taxes on all tobacco products are needed
to maximize the health benefits of a tobacco tax increase.
- The impact of a tobacco tax increase on use depends on
the magnitude of the price increase.
- Allocating tobacco taxes for tobacco control efforts,
including education and prevention, media campaigns, cessation
programs, and other public health efforts, as well as for
crop diversification and other efforts to reduce the impact
on tobacco growers can reduce some of the welfare losses
connected with the tax increase and can lead to even greater
reductions in tobacco use.
- Higher tobacco taxes are easy to implement. Most governments
already impose some tax on tobacco; so there is no need
to develop new, complex systems to increase taxes.
- Higher tobacco taxes also raise government revenue. Some
of the proceeds of higher tobacco taxes can be used to fund
other parts of the government's overall tobacco control
effort.
Helpful Links:
Advocacy Institute
http://www.advocacy.org/publications/mtc/priceincreases.htm
World Bank
http://www1.worldbank.org/tobacco/pdf/Taxes.pdf
Robert Wood Johnson Foundation
http://www.rwjf.org/reports/grr/022932.htm
World Health Organization
http://www.who.int/inf-pr-2000/en/pr2000-53.html
Tobacco and Cancer Programme
http://www.globalink.org/tobacco/fact_sheets/04fact.htm
Campaign for Tobacco Free Kids
http://tobaccofreekids.org/research/factsheets/pdf/0098.pdf
http://tobaccofreekids.org/campaign/global/docs/prices.pdf
Centers for Disease Control and Prevention
http://www.cdc.gov/mmwr/PDF/wk/mm5040.pdf
Tobacco Tax Initiative - Oregon, 1996 (1997)
http://www.cdc.gov/mmwr/preview/mmwrhtml/00047031.htm
Cigarette Smoking Before and After an Excise Tax
Increase and an Antismoking Campaign - Massachusetts, 1990-1996
http://www.cdc.gov/tobacco/research_data/adults_prev/mm4544.pdf
Tobacco Control in California: Who's Winning the
War? An Evaluation of the Tobacco Control Program,
1989-1996 (1998) (Chapter 8 Prices and Taxes)
http://ssdc.ucsd.edu/tobacco/reports/Chap8.pdf
Frank Chaloupka (the following 4 links provide an historical
and critical overview)
Bibliography
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of Smoking, National Bureau of Economic Research Working
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- Chaloupka, F.J., Tauras, J.A., and Grossman, M. (2002).
The Economics of Addiction. World Bank. http://tigger.uic.edu/~fjc/Presentations/Scans/Final
PDFs/tc105to130.pdf
- Chaloupka, F.J. and Warner, K.E. (2000), "The Economics
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