Some economics of tobacco regulation

Cigarette smoking is involved in approximately 480,000 deaths each year in the United States – approximately one in five deaths. On average, cigarette smokers lose about 10 years of life expectancy. According to a 2020 US Surgeon General report:

Tobacco use remains the leading cause of preventable disease, disability, and death in the United States. Approximately 34 million American adults currently smoke cigarettes, with most of them smoking on a daily basis. Almost all adult smokers have been smoking since adolescence. More than two-thirds of smokers report quitting, and thousands are trying to quit every day. But because the nicotine in cigarettes is highly addictive, it takes most smokers multiple attempts to quit for good.

Philip DeCicca, Donald Kenkel, and Michael F. Lovenheim summarize findings on The Economics of Tobacco Regulation: A Comprehensive Review (Journal of Business Literature, Sep 2022, 883-970). Of course, I can’t hope to do her work justice in a blog post, but here are some of the points that caught my eye.

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

For example, here is 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). In both cases, a strong increase from around 1996 to 2008 can be seen.

In addition, smoking bans have increased significantly.

Governments around the world have sporadically enacted smoking bans over the past five decades, but over the past two decades they have become much more common. … [W]Smoke-free indoor air laws for workplaces, bars and restaurants were becoming more common. As of 2000, no state had enacted a comprehensive ban on smoking in these areas, although some states had enacted 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 At the turn of the century, increased taxation and regulation of cigarettes and tobacco is unprecedented and dramatic.

2. Given that tobacco use is counteracted in different ways at the same time, it is difficult for researchers to separate the effects of, for example, cigarette taxes vs. smoking bans in the workplace vs. government-mandated warnings vs. changes in social acceptance.

3. My understanding of the conventional wisdom so far has been that adult smoker demand for cigarettes has been relatively inelastic, while younger smoker demand has been relatively elastic. The underlying belief was that adult smokers (as a group) have a longer lasting tobacco habit and have more income, making it more difficult for them to shake off their tobacco habit, while younger smokers’ tobacco use is more adaptive. This conventional wisdom may require some adjustments.

The consensus from the last major review of research, conducted 20 years ago (Chaloupka and Warner 2000), shows that adult cigarette demand is inelastic.
Recent research from an era of much higher cigarette taxes and lower smoking rates supports this consensus, but there is also evidence that traditional
Methods for estimating cigarette price responsiveness exaggerate price elasticities of
support financially. Also, recent research casts doubt on the earlier consensus that youth
smoking demand is more price-elastic than adult demand; the most credible studies
Adolescents who smoke indicate a weak association between smoking initiation and the cigarette
Steer. The inelasticity of cigarette demand suggests that excise taxes on cigarettes are an efficient revenue generating tool.

To put it another way, higher cigarette taxes do a decent job of raising revenue, but they don’t do much to discourage smoking.

4) If cigarette taxes are really about raising revenue because they don’t do much to discourage smoking, then it becomes particularly relevant that low-income people tend to smoke more and therefore end up paying more cigarette taxes. This figure shows cigarette consumption by income group; The next figure shows the cigarette taxes paid by income group.

5) Broadly speaking, there are two economic justifications for cigarette taxes. Economists call this “externalities,” which are the costs that cigarette smokers impose on others, including second-hand smoke and higher healthcare costs shared with non-smokers by public and private health insurers. The other is ‘internalities’, which are the costs imposed on smokers who would like to quit but are trapped by the added nicotine. The authors write:

However, evidence of the magnitude of the externalities caused by smoking does not necessarily support current tax rates. Behavioral economics research suggests that the internals of smoking provide a potentially stronger rationale for higher taxes and stricter regulations. But the empirical evidence for the extent of smoking’s internalities is surprisingly sparse.

6) Finally, reading the article, I wonder if the US is replacing tobacco cigarettes with marijuana to any degree. As the authors point out, the few detailed research studies on the subject have found no such association. By and large, however, the trendline for cigarette use is clearly pointing down over time, while the trendline for marijuana use is pointing up. A recent Gallup poll reports that “More people in the US now smoke marijuana than cigarettes.” Evidence from the National Survey on Drug Use and Health doesn’t more or less support this claim:[m}orepeopleintheUSarenowsmokingmarijuanathancigarettes”EvidencefromtheNationalSurveyonDrugUseandHealthdoesn’tmore-or-lessbacksupthatclaim:[m}orepeopleintheUSarenowsmokingmarijuanathancigarettes”EvidencefromtheNationalSurveyonDrugUseandHealthdoesn’tmore-or-lessbacksupthatclaim:

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

However, about a fifth of tobacco users did not smoke cigarettes, and with this adjustment, cigarette smoking would be slightly below total marijuana use.

For those interested in learning more about quitting smoking, here are some previous posts: