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Categories: Featured Articles, Newsletter, Newsletter Issue 2017:1

Directions in the Economics of Smoking

Philip DeCicca, Ball State University
Donald Kenkel, Cornell University
Michael Lovenheim, Cornell University
Erik Nesson, Ball State University

Smoking prevention has been a key component of health policy in the United States since the Surgeon General’s report roughly half of a century ago. Public policies intended to reduce the harm from smoking include cigarette taxation, place-specific smoking bans, and anti-smoking informational campaigns. Despite recent policy intensity, academic research is mixed regarding whether, and to what extent, the observed reductions in smoking over time are due to policies or are part of more general trends. The publication of the Hansen, Sabia and Rees (2017) article by the American Journal of Health Economics (AJHE) provides impetus to review, albeit very briefly, important directions in research on the economics of smoking.

We focus on the period since the 1998 Master Settlement Agreement (MSA) between the tobacco industry and state attorneys general. Chaloupka and Warner (2000) provide a comprehensive review of the older research literature, which mainly used aggregate time series data or data from single cross sections to estimate models of cigarette demand. The more recent research exploits the greater availability of detailed micro data on smoking behavior, such as the Tobacco Use Supplements to the Current Population Survey (CPS), the Nielsen Homescan Consumer Panel, and the Behavioral Risk Factor and Surveillance System (BRFSS). Recent research also exploits the extensive policy variation that has occurred since 1998. As a result, studies after 2000 tend to use stronger research designs, most notably difference-in-difference approaches surrounding state policy changes, to estimate the causal effects of public policies on smoking. The recent studies also use the detailed micro data that allow more detailed analyses of cross-group heterogeneity and tax avoidance behavior.

While there have been many types of recent tobacco control policy changes, given the focus of Hansen, Sabia and Rees (2017) we focus on studies of the impact of excise taxes on smoking behavior. Cigarette taxes are a core determinant of cigarette prices (Harding, Leibtag and Lovenheim, 2012; DeCicca, Kenkel and Liu, 2013a). Since the turn of the century, cigarette taxes have increased dramatically in the United States, including in places with historically low levels of taxation (e.g., tobacco producing states such as Kentucky and Virginia). From 2000-2015, the average price of cigarettes increased from about $3 to $6.25 per pack, while the average per-pack excise tax increased from 65 cents to just over $2.50. In general, research from this period finds that smoking is less price-responsive than previously thought. This finding pertains to research on the price-responsiveness of youth smoking (c.f., Hansen, Sabia and Rees, 2017; Nonnemaker and Farrelly, 2011; Carpenter and Cook, 2008; DeCicca, Kenkel and Liu, 2008; DeCicca, Kenkel and Mathios, 2002) as well as the research on the price-responsiveness of adult smoking (c.f., Nesson, 2017; Callison and Kaestner, 2014; Maclean, Sikora-Kessler and Kenkel, 2014; DeCicca and McLeod, 2008; Tauras, 2006).

The older cross-sectional research might have yielded upwardly biased estimates of the price-responsiveness of smoking because it failed to account for unobserved heterogeneity across states that is correlated both with smoking behavior and with cigarette taxes in the cross section. The more recent research controls for such heterogeneity, typically by including state fixed effects. But, direct controls for a proxy of anti-smoking sentiment yields similar results (DeCicca et al., 2008). The fact that the more recent research finds less price-responsiveness is consistent with the argument that the earlier estimates were upwardly biased (in absolute value). Debate continues as to both the existence and extent of the excise tax-smoking relationship. Nevertheless, it seems fair to conclude from the recent literature that the impact of cigarette prices on smoking behavior is smaller in magnitude than it was originally believed based on earlier research.

Starting in the mid 2000s, new research on cigarette tax avoidance also emerged. Most prominent among the avoidance behaviors examined was “casual” cigarette smuggling, mainly in the form of smokers purchasing cigarettes across state borders in lower-tax jurisdictions. Researchers have long recognized that the large cross-state variation in cigarette tax rates creates opportunities for casual smuggling. The recent rise in empirical work that seeks to estimate the extent of such smuggling is due principally to two factors. First, there was a general perception that higher cigarette taxes were not reducing smoking, particularly smoking prevalence, to the extent implied by the early econometric evidence (DeCicca and Kenkel, 2015). Second, the effective quadrupling of state cigarette taxes in the past twenty years, given its inherent spatial variation, has given rise to substantial incentives to engage in cross-border purchasing as well as purchasing from tax-free sources like Native American reservations.

In general, a large body of research finds that smokers, particularly those living close to lower-tax borders or purchasing online, engage in non-trivial amounts of such tax avoidance (c.f., Carpenter and Mathes, 2015; DeCicca, Kenkel and Liu, 2015; Chiou and Muehlegger, 2014; Chernick and Merriman, 2013; DeCicca, Kenkel and Liu, 2013a; DeCicca, Kenkel and Liu, 2013b; Harding, Leibtag and Lovenheim, 2012; Merriman, 2010; Chiou and Muehlegger, 2010; Goolsbee, Lovenheim and Slemrod, 2010; Lovenheim, 2008; Stehr, 2005). Such avoidance behavior has the potential to attenuate the intended impacts of state cigarette tax increases on smoking-related health outcomes. However, no research has directly examined the impact of tax avoidance on smoking-related public health outcomes.

Perhaps due to a perception that traditional policy has been less effective than expected in achieving related public health goals, recent anti-smoking policy has taken a decidedly regulatory approach. Indeed, the Family Smoking and Tobacco Control Act of 2009 (TCA) gave the U.S. Food and Drug Administration broad new regulatory powers over cigarette production and marketing. To a large extent, the U.S. was merely catching up to nations such as Australia and Canada, which already imposed stricter regulatory regimes. Regulations already in place in many countries include graphic warning labels on cigarette packaging, plain packaging laws which prohibit brand logos, and restrictions or total bans on advertising.

The newer regulatory trend focuses on smoking product attributes such as flavors or even nicotine content. The regulations attempt to reduce smoking by making it less desirable to the actual or potential smoker. Research in the economics of smoking has followed this policy development, both in the United States and abroad, where stricter regulatory regimes often have been in existence for a while (c.f., Durkin et al., 2015; Scollo et al., 2015; Irvine and Nguyen, 2014; Monarrez-Espino et al., 2014; Wakefield et al., 2013; Cohen et al., 2011; Scheffels and Lavik, 2011; Adda and Cornaglia, 2010). While the federal nature of the U.S. TCA make statistical identification of its impacts difficult to estimate, its passage has reignited more direct interest in the welfare economics of tobacco control. A set of studies address difficult issues about how to properly value the gains and losses of both smokers and non-smokers (c.f, DeCicca, Kenkel, Liu and Wang, 2016; Levy, Norton and Smith, 2016; Ashley, Nardinelli and Lavaty,2015; Cutler, Jessup, Kenkel and Starr, 2015; Jin, Kenkel, Liu and Wang, 2015).

As mentioned above, the econometric techniques applied in economic research on smoking have evolved with the availability of improved data. While the movement from single cross-sections to repeated cross-sections or panel data likely represents an improvement, there are no randomized field experiments that evaluate cigarette taxes or tobacco regulations. Instead, researchers rely on state-of-the-art difference-in-differences type models, which have their own shortcomings. Chief among them is that they rely on within-area variation over time that, itself, may reflect state-level differences in unobservable characteristics related to the determination of cigarette tax rates and also smoking behavior. That is, the within-state variation may, itself, be endogenous. To the extent that such unobserved factors are constant over time, these estimators should do a reasonable job of estimating policy effects. To deal with the possibility of non-common trends across areas contributing policy variation, researchers have started to include state-specific time trends in their models. While ostensibly a useful development, their inclusion raises issues of possible “over-controlling” in ways that could minimize the true policy effect if there are time-varying treatment effects. There are many other methodological issues that merit discussion, including issues surrounding variance computation, measurement of smoking behavior, and how best to address the inherent dynamics of an addictive good like cigarettes. Space prevents us from dealing with them at this time.

Given space constraints, we have had to omit several research areas within the economics of smoking, such as the equity impacts of increased cigarette taxation, the health impacts of anti-smoking policies, and the research on place-specific smoking bans, which is flourishing with the with the emergence of clean-air laws across the globe (c.f., Carpenter, Postolek and Warman, 2011). We also have not discussed the research on smokers’ offsetting responses to anti-smoking policies (c.f., Cotti, Nesson and Teftt, 2016; Abrevaya and Puzzello, 2012; Adda and Cornaglia, 2006)).

We believe that research on the economics of smoking remains robust and that interest in the newer areas we identified (i.e., tax avoidance and regulation) will continue to grow. We also expect the literature to expand in new directions, such as the evaluation of novel technologies, like electronic cigarettes and heat-not-burn cigarettes, which, with few exceptions has been constrained thus far by data availability (c.f., Friedman, 2015) and. More research is needed on these emerging new technologies and products and will almost certainly be forthcoming as data availability catches up. Indeed, current research in the economics of smoking is wide and deep, and we expect expansions in both directions over the coming two decades.


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