High-Resolution Behavioral Economic Analysis of Cigarette Demand to Inform Tax Policy

Aims: Novel methods in behavioral economics permit the systematic assessment of the relationship between cigarette consumption and price. Toward informing tax policy, the goals of this study were to conduct a high-resolution analysis of cigarette demand in a large sample of adult smokers and to use the data to estimate the effects of tax increases in ten U.S. States.

Design: In-person descriptive survey assessment.

Setting: Academic departments at three universities.

Participants: Adult daily smokers (i.e., 5+ cigarettes/day; 18+ years old; ≥8th grade education); N = 1056.

Measurements: Estimated cigarette demand, demographics, expired carbon monoxide.

Findings: The cigarette demand curve exhibited highly variable levels of price sensitivity, especially in the form of ‘left-digit effects’ (i.e., very high price sensitivity as pack prices transitioned from one whole number to the next; e.g., $5.80-$6/pack). A $1 tax increase in the ten states was projected to reduce the economic burden of smoking by an average of $531M (range: $93.6M-$976.5M) and increase gross tax revenue by an average of 162% (range: 114%- 247%).

Conclusions: Tobacco price sensitivity is nonlinear across the demand curve and in particular for pack-level left-digit price transitions. Tax increases in U.S. states with similar price and tax rates to the sample are projected to result in substantial decreases in smoking-related costs and substantial increases in tax revenues.

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December 2012

Authors:
  • James MacKillop
  • Lauren R. Few
  • James G. Murphy
  • Lauren M. Wier
  • John Acker
  • Cara Murphy
  • Monika Stojek
  • Maureen Carrigan
  • Frank J. Chaloupka