EXPLANATIONS AND SOURCES FOR TFK? PROJECTIONS OF NEW REVENUES & BENEFITS FROM STATE CIGARETTE TAX INCREASES
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The Campaign for Tobacco-Free Kids (TFK) projections of increased state revenues and other benefits from raising state cigarette tax rates reflect the basic fact that cigarette tax increases both boost state cigarette tax revenues and reduce smoking because the increased tax per pack brings in more new revenue than is lost from the declines in pack sales caused by consumption declines or increased smoker tax avoidance prompted by the price increase.
These projections are based, in part, on research findings that a 10% cigarette price increase, if maintained against inflation, reduces youth smoking rates by 6.5% or more, adult rates by 2%, and total consumption by 4%. [See, e.g, Chaloupka, FJ, ?acro-Social Influences: The Effects of Prices and Tobacco Control Policies on the Demand for Tobacco Products, Nicotine & Tobacco Research, 2000, and other price studies at tigger.uic.edu/~fjc; Tauras, J, et al., ?ffects of Price and Access Laws on Teenage Smoking Initiation: A National Longitudinal Analysis, Bridging the Gap Research, ImpacTeen, April 24, 2001, and other price studies at www.impacteen.org.] But these elasticity findings are adjusted downward to be conservative and to account for some smokers avoiding the price increases through a range of tax evasion strategies. Despite such tax evasion, cigarette tax increases reduce smoking rates, which, in turn, reduces smoking caused disease, death, and economic costs. Parallel increases to state excise taxes on other tobacco products would similarly provide additional new state excise tax and sale tax revenue while also reducing the use of these products in the state, and reducing related harms and healthcare costs.
These projections are fiscally conservative because they include generous adjustments for lost state pack sales (and reduced state revenue gains) caused by new tax avoidance efforts by continuing in-state smokers and, where applicable, fewer in-state cigarette sales to supply smokers from other states, informal smugglers, criminal smuggling organizations, or multistate internet sellers. [See, e.g., Farrelly, M, et al., ?igarette Smuggling Revisited, U.S. Centers for Disease Control & Prevention (CDC), in press, and Farrelly, M, et al., State Cigarette Excise Taxes: Implications for Revenue and Tax Evasion, RTI International, 2003, www.rti.org/pubs/8742_Excise_Taxes_FR_5-03.pdf.] To account for possible additional declines in state cigarette sales and revenues from other factors such as state tobacco prevention investments, other public and private tobacco prevention efforts, federal cigarette tax changes, cigarette company or other increases to cigarette prices, etc. these projections also assume a background year-to-year decline in consumption of 1.5%. To be even more conservative, the projected amounts have also been rounded down.1
Despite all of these conservative adjustments, the projections still show that non-trivial state cigarette tax increases will both significantly reduce smoking levels and substantially increase state revenues. The increased tax per pack will still bring in more new state revenue than is lost from the decrease in the number of packs sold caused by the tax increase from either consumption declines, tax avoidance, or smuggling. And that is exactly what has happened in every state that has significantly increased its cigarette tax rates. [See, e.g., TFK Factsheet, Raising State Cigarette Taxes Always Increases State Revenues (and Always Reduces Smoking), tobaccofreekids.org/research/factsheets/pdf/0098.pdf.]
In those states that apply their sales tax percentage to the total retail price of a pack of cigarettes (including the state cigarette tax amount), a cigarette tax increase will raise state sales tax revenues per pack, which will offset sales tax revenue losses from fewer packs being sold. In addition, smokers who quit or cut back will likely spend the money they previously spent on cigarettes largely on other goods on which sales tax is collected, which further increases state sales tax revenues.
These projections assume that the tax increase is fully passed on in higher prices, and keeps up with inflation over time. The starting price per pack (before the proposed cigarette tax increase) used in these projections includes all federal and statewide excise and sales taxes but not any purely local taxes (except that NY City? $1.50 per pack tax is factored into the overall NY State price per pack), and is based on data from The Tax Burden on Tobacco, 2006, reports of state cigarette tax increases, and media reports on tobacco company price changes, USDA Economic Research Service, Tobacco Briefing Room, www.ers.usda.gov/briefing/tobacco. The starting price per pack data have been slightly adjusted downward because The Tax Burden on Tobacco does not completely account for retailer-based discounts, promotions, and coupons.
These projections assume that the state or district will follow standard practice and apply the cigarette tax increase to all previously tax-stamped or otherwise tax-paid cigarettes held in inventory by wholesalers or retailers on the effective date of the increase. Failing to tax such cigarettes held in inventory would open the door to massive pre-increase stockpiling by retailers and wholesalers to evade the increase, drastically reducing the amount of new state revenues.
The projections for youths stopped from becoming smokers and avoided premature youth and adult deaths are calculated by applying the above findings regarding the effects of tax and price increases to the number of current adult smokers in each state and to estimates from CDC of the number of kids alive today in each state who will become adult smokers and the number projected to die from smoking. [CDC, State Data Highlights 2006, www.cdc.gov/tobacco/data_statistics/state_data/data_highlights/2006/index.htm.] For an explanation of how CDC makes these youth projections, see CDC, ?rojected Smoking-Related Deaths Among Youth United States, MMWR 45(44):971-974, November 11, 1996, www.cdc.gov/mmwr/preview/mmwrhtml/00044348.htm, which also contains data on relative death risks of smokers, nonsmokers, former smokers, etc.]
Because of research and data limitations, it is not yet possible to estimate health savings in each year following a cigarette tax increase, or even provide reasonable estimates of the total health care savings over the first five or ten years. Although smoking-caused healthcare cost savings from a cigarette tax increase will be relatively small in the first year after an increase, they grow quickly. The listed 5-Year savings from fewer smoking-caused heart attacks and strokes and from fewer smoking-affected pregnancies and related birth complications show just some of the many substantial savings from the smoking reductions prompted by a tax increase that begin to accrue immediately.
The projected healthcare savings from reducing the number of future youth and current adult smokers accrue over the lifetimes of kids alive in the state today who quit or don't start because of tax increase and over the lifetimes of those current adult smokers who quit because of the tax increase. Smokers lifetime healthcare costs average at least $16,000 higher than nonsmokers (in 2002 dollars), despite shorter life spans; but the savings per each adult quitter are less than that because adult smokers have already been significantly harmed by their smoking and have already incurred or locked-in extra, smoking-caused health costs. [Hodgson, TA, ?igarette Smoking and Lifetime Medical Expenditures,?i> The Millbank Quarterly 70(1), 1992. See also, Nusselder, W, et al., ?moking and the Compression of Morbidity, Epidemiology & Community Health, 2000; Warner, K, et al., ?edical Costs of Smoking in the United States: Estimates, Their Validity, and Their Implications, Tobacco Control 8(3):290-300, Autumn 1999, http://tc.bmjjournals. com/content/vol8/issue3/index.shtml. CDC, ?rojected Smoking-Related Deaths Among Youth United States,?i> MMWR 45(44):971-974, November 8, 1996, www.cdc.gov/mmwr/preview/mmwrhtml/00044348.htm. See also, ?nnual Smoking-Attributable Mortality, Years of Potential Life Lost, and Economic Costs United States 1995-1999,?i> MMWR 51(14):300-303, April 11, 2002, www.cdc.gov/mmwr/preview/mmwrhtml/mm5114a2.htm.]
5-Year Heart & Stroke Savings projections show the estimated reductions in smoking-caused healthcare expenditures within first five years after the tax increase from reduced smoking-caused heart attacks and strokes, based on Lightwood & Glantz, ?hort-Term Economic and Health Benefits of Smoking Cessation Myocardial Infarction and Stroke, Circulation 96(4), August 19, 1997. These savings will increase steadily in subsequent years. The projected 5-Year Smoking Births Savings accrue from declines in smoking among pregnant women and corresponding reductions in smoking-caused birth complications and related first-year health costs. [Miller, D, et al., ?irth and First-Year Costs for Mothers and Infants Attributable to Maternal Smoking,?i> Nicotine & Tobacco Research 3:25-35, 2001; and state pregnancy-smoking and births data.]
All projected savings have been adjusted to 2002 dollars using the same methodology used by CDC to update its data on state smoking-caused costs. The projected savings amounts would be larger if put in 2004 dollars, but using CDC methodology to put them in 2002 dollars makes the projections more conservative and reliable and makes them comparable to CDC? estimates of smoking-caused state costs. [See CDC, Sustaining State Programs for Tobacco Control: Data Highlights 2006, http://www.cdc.gov/tobacco/data_statistics/state_data/data_highlights/2006/index.htm.] These projections do not include a range of additional short and long-term savings from other declines in smoking-caused health problems and other smoking-caused costs. [See, e.g., U.S. Department of the Treasury, The Economic Costs of Smoking in the U.S. and the Benefits of Comprehensive Tobacco Legislation, 1998.]
Campaign for Tobacco-Free Kids, February 5, 2008 / Eric Lindblom
Please direct questions to Eric Lindblom, Campaign for Tobacco-Free Kids, elindblom@tobaccofreekids.org or 202-296-5469. Projections change when new data or research findings become available and the underlying data and formulas are updated or revised.
For more on tobacco tax increases and related benefits, see http://tobaccofreekids.org/reports/prices & http://tobaccofreekids.org/research/ factsheets/index.php?CategoryID=18.
1 Cigarette company price cuts and other factors could also work to increase cigarette consumption and/or sales in the state, which would increase state cigarette tax revenues beyond the projected amounts.