Tobacco Taxes Work! Consumer Responses to Cigarette Price Increases- Evidence from Think Tanks in Latin America

Over the last five years, Tobacconomics has been partnering with think tanks in low- and middle-income countries (LMICs) to develop the necessary economic evidence base for effective tobacco control. The six questions that inform the core competencies (shown below) are based on current tobacco tax policy discussions and guide our research efforts, ensuring that the findings can be utilized to inform policy.

This blog is a part of a larger blog series, which will highlight evidence from each research core competency by region (Asia, Latin America, and Southeastern Europe). Below, we focus on the first research core competency and the research from our partners in Latin America.

# Research Core Competency Questions
1 How do consumers of tobacco respond to tobacco taxes, and how would consumers respond to tax increases and other structural reforms to fiscal policies?
2 How would a given fiscal policy affect the price of tobacco products, and how would this change in price affect government revenues, consumption, and health outcomes?
3 How would the fiscal policy affect the poor?
4 What are the health and economic costs of a given unhealthy behavior and how can the fiscal policy address these costs?
5 How would the fiscal policy affect employment and economic growth?
6 To what extent is the fiscal policy related to illicit trade of tobacco products?

Although opponents of tobacco taxes, most commonly the tobacco industry, claim that smokers are not responsive to price increases because smoking is addictive, evidence from around the world contradicts this claim. Many users smoke less or quit following significant price increases. In order to assess the effect of price on consumption, researchers in Latin America produce estimates of demand elasticities using household budget survey data, as outlined in A Toolkit on Using Household Expenditure Surveys for Research in the Economics of Tobacco Control (updated version coming later this year) and other methodologies. Users typically reduce consumption less than proportionately to price increases because of the addictive nature of tobacco products. This means that well-designed tobacco taxes have the potential to promote both public health and fiscal goals. Using demand elasticity estimates and economic simulations, policy makers can set effective tax rates to reap these benefits.

In Latin America, we have worked in six countries with eleven think tanks. Specifically, we partnered with Instituto Torcuato Di Tella (ITDT), Universidad Nacional de San Martin (UNSAM), and Center of Distributive, Labor and Social Studies (CEDLAS) in Argentina; Fundação Centro de Estudos do Comércio Exterior (FUNCEX) and Universidade Católica de Brasília (UCB) in Brazil; Pontificia Universidad Católica del Ecuador (PUCE) in Ecuador; Ethos Laboratorio de políticas públicas (ETHOS), Centro de Investigación en Alimentación y Desarrollo (CIAD) and Centro de Investigación Económica y Presupuestaria A.C. (CIEP) in Mexico; Centro de Análisis y Difusión de la Economía Paraguaya (CADEP) in Paraguay, and Instituto de Estudios Peruanos (IEP) in Peru.

Across the region, the demand elasticities for cigarettes were negative (view all of the results here).  Most of the studies found that demand for cigarettes is inelastic, meaning that a 10% increase in price would result in a reduction in demand of less than 10%. Demand for cigarettes in Paraguay was nearly elastic, at -0.97, while the demand elasticities estimated in Brazil and Peru were lower at -0.59 and -0.40, respectively. Two studies from Mexico found that the elasticity of demand was -0.58 and -0.66. Some of the think tanks analyzed price responsiveness in relation to age as well. In Argentina, CEDLAS found that younger age groups were more responsive to price relative to older groups, although this trend was not seen in Brazil.

The evidence produced by local partners in the region demonstrates the potential for increasing tobacco taxes to reduce consumption and improve public health, hereby reducing the cost of medical care. At the same time, raising cigarette taxes to effectively increase cigarette prices would be a significant source of additional government revenue, as consumption would decrease less than proportionately to price in most of the countries.

If you missed it, check out our blog on the region of Asia and Southeastern Europe, and blogs on the second research core competency are coming soon!