Saturday, November 04, 2006

Smoke! Smoke! Smoke! (That Cigarette)

At least as long ago as 1947, it was widely known that cigarette smoking was unhealthy, hence the caption on this post from the title of a famous popular song of that year. Apparently, the people at the Tax Foundation haven't figured out that this represents a public health issue. They oppose an increase in cigarette excise taxes because of a perceived spur to the criminal enterprise of cigarette bootlegging. (And see here.)

As long ago as 1981, the cigarette industry realized that:
Given a prince elasticity of -0.4 for total cigarette sales and -1.2 for teenage smoking participation, a 25 percent increase in the excise tax could be expected to reduce industry sales to about 1.2 percent below what would be expected in the absence of such an increase, and to reduce the number of teenage smokers to 3.5 to. 4.0 percent.
As even the Tax Foundation admits, cigarettes are highly addictive. The ability to quit is related to the age at which one begins smoking--it's easier to quit the later you begin. Although I've seen no specific studies on this, one must assume that price elasticity is even more pronounced among younger teens. Thus, it makes good public health policy to increase the cost of cigarette consumption by increasing excise taxes. Thus, increasing excise taxes will have its greatest impact on those physically most at risk and will have positive effects for years going forward.

The Cato study cited by TF is fairly irrelevant. It deals with cigarette smuggling into New York state and New York City which had high excise taxes relative to the rest of the country. The conclusion, that excise taxes always increase bootlegging, is simply not supportable. The correct conclusion is that excise taxes that are higher than those in jurisdictions that smugglers can easily travel to and from (e.g., North Carolina) can trigger an increase in criminal activity. However, that is not likely to be the case if, for instance, taxes are increased by a majority of all taxing jurisdictions. Moreover, to the extent that high excise taxes, coupled with a variety of other anti-smoking programs, reduce teen smoking, over time the demand (and the profit in smuggling) will decline. In fact, that's exactly what's been happening for a number of years.

Just because a tax (or, for that matter, any enactment) has negative effects is not, in and of itself, a basis for opposing the tax. One has to weigh the negative impact (e.g., smuggling) against the positive effects (e.g., reduction in teen smoking, leading to a long-term, overall reduction, leading to a reduction in cigarette smuggling). TF offers only a one-eye view of cigarette excise taxes.

Finally, in 2003, a California study concluded that "[p]reviously published studies that analyzed data from various time periods between 1950 and 2000 have estimated that 2% to 6% of cigarettes are smuggled within the United States" and that "the tobacco industry exaggerates smuggling claims." Thus, it's not at all clear that any increase in cigarette bootlegging is a major criminal problem.

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