The Economics of Tobacco Taxation In Massachusetts

The Economics of Tobacco Taxation In Massachusetts Frank J. Chaloupka Director, ImpacTeen Project and International Tobacco Evidence Network Director, Health Policy Center University of Illinois at Chicago fjc@uic.edu www.impacteen.org www.tobaccoevidence.net March 6, 2008 Harvard University, School of Public Health

Overview History/description of cigarette and other tobacco taxes in the US and states Review of evidence on the impact of taxes on prices and tobacco use Consumption Prevalence Cessation Initiation Brief review of evidence on the impact of earmarked tobacco taxes Myths and Facts about the economic costs of tobacco taxation and tobacco control

Tobacco industry clearly understands the impact of tobacco taxation "With regard to taxation, it is clear that in the US, and in most countries in which we operate, tax is becoming a major threat to our existence." "Of all the concerns, there is one - taxation - that alarms us the most. While marketing restrictions and public and passive smoking (restrictions) do depress volume, in our experience taxation depresses it much more severely. Our concern for taxation is, therefore, central to our thinking..." Philip Morris, Smoking and Health Initiatives, 1985

Tobacco Taxation in the U.S. Federal cigarette tax Specific (per unit) excise tax initially adopted in 1864 Raised during war time/lowered during peace time Set at 8 cents per pack in 1951 Doubled to 16 cents per pack in 1983 Currently 39 cents per pack About 60% of inflation adjusted value of 1951 tax Other federal tobacco taxes Specific excise taxes on most products, including cigars, pipe tobacco, chewing tobacco, snuff, and roll-your-own tobacco (and separately on rolling papers) Generally lower than cigarette tax Similar infrequent increases in taxes

Tobacco Taxation in the U.S. State cigarette taxes First adopted by IA in 1921; NC last to adopt in 1969 Specific excise tax in all states Currently: 7.0 cents/pack (SC) to $2.575/pack (NJ) Numerous state tax increases over past 5 years Average $1.11 per pack (33.5 cents in tobacco growing states; $1.22 in other states) Several proposing additional increases Most states tax other tobacco products Almost always an ad valorem tax (% of price) Sales tax applied to tobacco products in most states Local Taxes Many localities add additional tax Typically a few cents/pack, with some exceptions:» $1.50 in New York City» $2.68 in Chicago/Cook county

State Cigarette Excise Taxes As of 1/1/08 Source: American Lung Association

Price (dollars p er p ack) $6.00 $5.50 $5.00 Price (dollars per pack $4.50 $4.00 $6.00 $5.50 $5.00 $4.50 $4.00 State Cigarette Taxes and Prices, November 1, 2006 State Cigarette Taxes and Prices, November 1, 2005 y = 1.1672x + 2.9607 R 2 = 0.9086 y = 1.2013x + 2.9658 R 2 = 0.9256 $3.50 $3.50 $3.00 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 Tax (dollars per pack) Tax (dollars per pack) Source: Tax Burden on Tobacco, 2006, and author s calculations

$4.50 Cigarette Taxes and Prices, 1976-2007 Inflation Adjusted (Dec. 2007 dollars) $4.00 $3.50 D o ll a r s p e r P a c k $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Year State Tax Federal Tax MSA Costs Net Price Source: Tax Burden on Tobacco, 2007, and author s calculations

Tax as Percent of Price United States, 1955-2007 53.0% 48.0% 43.0% 38.0% 33.0% 28.0% 23.0% 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Tax only Tax+MSA Source: Tax Burden on Tobacco, 2007, and author s calculations

$0.90 Cigarette Marketing Expenditures per Pack Inflation Adjusted, 1975-2005 $0.80 $0.70 D o llars (A u g u st $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Year Non-Price Other Price Source: Federal Trade Commission, 2005, and author s calculations

Average Cigarette Prices, 1975-2005 Inflation Adjusted $4.00 Dollars per Pack (August 2007 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Year Price Price-Price Related Marketing Sources: Tax Burden on Tobacco, 2007, FTC, 2007, and author s calculations

Tobacco Taxation in Massachusetts Cigarette excise tax initially implemented in 1939: 5 cents per pack Raised relatively frequently over time (compared to other states) Most recent increase was from 76 cents to $1.51 per pack on July 25, 2002 Previous increases from 26 to 51 cents (1/1/93) and 51 to 76 cents (10/1/96) Currently 15 th highest state cigarette tax $1.22 in non-tobacco; $0.335 in tobacco Tax on other tobacco products 90% of wholesale price on snuff, chewing tobacco 30% of wholesale price on cigars, smoking tobacco

$6.00 Components of Cigarette Prices in Masschusetts Inflation Adjusted, 1970-2007 $5.00 D o llars (D ec. 2007 d o llars $4.00 $3.00 $2.00 $1.00 $0.00 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Year State Tax Fed. Tax Settlement Payments Mftr/Dist/Ret Source: Tax Burden on Tobacco, 2007, and author s calculations

55.0% Cigarette Taxes as Percent of Price in Massachusetts FY1966-2007 50.0% 45.0% 40.0% Percentage 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Year State State & Federal Source: Tax Burden on Tobacco, 2007, and author s calculations

Tobacco Taxes and Tobacco Use Higher taxes induce quitting, prevent relapse, reduce consumption and prevent starting. Estimates from high-income countries indicate that 10% rise in price reduces overall cigarette consumption by about 4% price elasticity of demand: percentage reduction in consumption resulting from one percent increase in price Most elasticity estimates in range from -0.25 to -0.5, clustered around -0.4 More recent elasticity estimates for tax paid sales significantly higher Reflects increased tax avoidance/evasion not accounted for in studies Source: Chaloupka et al., 2000

S a l e s (m i l l i o n p a c k s ) 29500 27500 25500 23500 21500 19500 Cigarette Prices and Cigarette Sales United States, 1970-2007 $4.25 $3.75 $3.25 $2.75 $2.25 $1.75 P r i c e (D e c. 2 0 0 7 d o l l a r s ) 17500 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Year Sales Price $1.25 Source: Tax Burden on Tobacco, 2007, and author s calculations

Cigarette Sales and Cigarette Prices, Minnesota, 1975-2005 $3.90 475 Sales (million packs 425 375 $3.40 $2.90 $2.40 $1.90 Price (1/06 dollars 325 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Year Sales Price $1.40 Source: Tax Burden on Tobacco, 2007, and author s calculations

400 Cigarette Prices and Sales Colorado, 1970-2005 380 $3.75 S ales (m illio n p acks 360 340 320 300 280 260 $3.25 $2.75 $2.25 $1.75 P rice (Ju ly 2006 d o llars 240 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 Fiscal Year Sales Price Source: Tax Burden on Tobacco, 2007, and author s calculations $1.25

S a l e s (m i l l i o n p a c k s ) 710 660 610 560 510 460 410 360 310 260 Cigarette Prices and Sales Massachusetts, 1970-2007 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Fiscal Year $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 P r i c e (D e c. 2 0 0 7 d o l l a r s ) Sales Price Source: Tax Burden on Tobacco, 2007; Connolly, unpublished data; and author s calculations

Tobacco Taxes and Tobacco Use Higher taxes induce quitting, prevent relapse, reduce consumption and prevent starting. Estimates from high-income countries indicate that 10% rise in price reduces overall cigarette consumption by about 4% About half of impact of price increases is on smoking prevalence; remainder is on average cigarette consumption among smokers 10% rise in price reduces prevalence by about 2% Source: Chaloupka et al., 2000

Cigarette Prices and Adult Smoking Prevalence, United States, 1970-2007 35 $4.25 $3.75 P r e v a l e n c e 31 27 23 $3.25 $2.75 $2.25 $1.75 P r i c e (D e c. 2 0 0 7 d o l l a r s ) 19 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Year Prevalence Price $1.25 Source: NHIS, Tax Burden on Tobacco, 2007, and author s calculations Note: green data points for prevalence are interpolated assuming linear trend

33 Cigarette Prices and Adult (26+) Smoking Prevalence US State-Level Data, 2004-05 31 12-17 Sm o kin g Prevalen ce, 2004-0 29 27 25 23 21 19 y = -1.8409x + 31.943 R 2 = 0.1703 17 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 Price Per Pack (2004-05 dollars) Source: NSDUH, Tax Burden on Tobacco, 2007, and author s calculations

$6.00 Cigarette Price and Adult Smoking Prevalence in Massachusetts, 1990-2006 $5.50 23 P rice (Dec. 2007 dollars $5.00 $4.50 $4.00 $3.50 21 19 P revalence Rate $3.00 $2.50 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year 17 Price Prevalence Source: BRFSS, Tax Burden on Tobacco, 2007, and author s calculations

Tobacco Taxes and Tobacco Use Higher taxes induce quitting, prevent relapse, reduce consumption and prevent starting. Estimates from high-income countries indicate that 10% rise in price reduces overall cigarette consumption by about 4% About half of impact of price increases is on smoking prevalence; remainder is on average cigarette consumption among smokers Some evidence of substitution among tobacco products in response to relative price changes

Cigarette Prices and Smoking Cessation Growing evidence that higher cigarette prices Induce smoking cessation 10% price increase reduces duration of smoking by about 10% 10% price increase raises probability of cessation attempt by 10-12% 10% price increase raises probability of successful cessation by 1-2% Higher cigarette taxes/prices increase demand for NRT and cessation services Sources: Douglas, 1999; Tauras and Chaloupka, 2001; Tauras, 2001; Tauras and Chaloupka, 2003

Cigarette Price and Quitline Calls - Illinois, 2002-2003 C a l l s to Q u i tl i n e 1350 1150 950 750 550 350 150 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 Month Quitline Calls Price per Pack 4.25 4.15 4.05 3.95 3.85 3.75 P r i c e p e r P a c k (J u n e 2 0 0 4 d o l l a r s )

Cigarette Prices and Percentage of Ever Smokers Who Have Quit Smoking 42.0% 38.0% P e r c e n t Q u itte r s 34.0% 30.0% 26.0% y = 0.0167x + 0.2478 R 2 = 0.1276 22.0% 18.0% $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 Price (dollars per pack) Source: BRFSS, Tax Burden on Tobacco, 2006, and author s calculations

Lower SES populations are more price responsive Economic theory implies greater response to price by lower income persons Growing international evidence shows that smoking is most price responsive in lowest income countries Evidence from U.S. and U.K. shows that cigarette price increases have greatest impact on smoking among lowest income and least educated populations In U.S., for example, estimates indicate that smoking in households below median income level about four times more responsive to price than those above median income level Implies tax increases may be progressive Sources: Farrelly, et al., 2001; Chaloupka et al., 2000

Young People More Responsive to Price Increases Proportion of disposable income youth spends on cigarettes likely to exceed that for adults Peer influences much more important for young smokers than for adult smokers recent estimates indicate about 1/3 of overall impact of price on youth accounted for by indirect impact through peers Young smokers less addicted than adult smokers Young people tend to discount the future more heavily than adults Other spillover effects for example, through parental smoking Source: Liang, et al., 2003; Chaloupka 2003

Cigarette Prices And Youth A 10% increase in price reduces smoking prevalence among youth by nearly 7% A 10% increase in price reduces average cigarette consumption among young smokers by over 6% Higher cigarette prices significantly reduce teens probability of becoming daily, addicted smokers; prevent moving to later stages of uptake. 10% price increase reduces probability of any initiation by about 3%, but reduces probability of daily smoking by nearly 9% and reduces probability of heavy daily smoking by over 10% Sources: Chaloupka and Grossman, 1996; Tauras, et al., 2001; Ross, et al., 2001

Cigarette Prices and Smoking Prevalence Ages 12-17, State-Level Data, 2004-05 17 12-17 Sm o kin g Prevalen ce, 2004-0 15 13 11 9 y = -0.9721x + 16.168 R 2 = 0.093 7 $3.25 $3.75 $4.25 $4.75 $5.25 $5.75 Price Per Pack (2004-05 dollars) Source: NSDUH, Tax Burden on Tobacco, 2007, and author s calculations

$4.75 Cigarette Price and Youth Smoking Prevalence, United States, 1991-2007 36 P r i c e p e r p a c k (1 2 / 0 7 d o l l a r s ) $4.00 $3.25 31 26 21 16 11 S m o k i n g P r e v a l e n c e $2.50 1991 1993 1995 1997 1999 2001 2003 2005 2007 Year 6 Cigarette Price 12th grade prevalence 10th grade prevalence 8th grade prevalence Source: MTF, Tax Burden on Tobacco, 2007, and author s calculations

Cigarette Prices and Young Adult Smoking Prevalence Ages 18-25, US State-Level Data, 2004-05 47 12-17 Sm o kin g Prevalen ce, 2004-0 42 37 32 y = -0.7491x + 43.592 R 2 = 0.0162 27 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 Price Per Pack (2004-05 dollars) Source: NSDUH, Tax Burden on Tobacco, 2007, and author s calculations

Support for Tobacco Tax Increases Generally consistent support among voters for tobacco tax increases Greater support when revenues dedicated to tobacco control efforts or other health-related activities Often supported by large share of smokers, particularly when tied to efforts to prevent youth smoking initiation Support tends to be bipartisan Greater support for tobacco tax increases than for other revenue generating measures Support tends to be consistent across demographic and socioeconomic groups

Impact of a Federal Cigarette Tax Increase Based on these estimate, a $0.61 per pack increase in the Federal cigarette tax (to $1.00 per pack) would: Reduce cigarette sales by over 1.1 billion packs Generate over $10 billion in new revenues Lead over 1.4 million current smokers to quit Prevent almost 1.9 million youth from taking up smoking Prevent over 900,000 premature deaths caused by smoking Generate significant reductions in spending on health care to treat diseases caused by smoking Reduce most state tobacco-related revenues Source: Chaloupka and Tauras, 2006

Tax Increases and Massachusetts Based on these estimate, a $1.00 per pack increase in the Massachusetts state cigarette tax would: Reduce cigarette sales by between 26 and 50 million packs per year Generate $150-220 million in new revenues Lead between 25,800-34,909 adult smokers to quit Prevent between 46,000-61,100 youth from taking up smoking Prevent 21,000-27,200 premature deaths caused by smoking Generate significant reductions in spending on health care to treat smoking attributable diseases Source: Campaign for Tobacco-Free Kids, 2008 and author s calculations

Earmarked Tobacco Taxes Many states earmark tobacco tax revenues for comprehensive tobacco control programs CA 1989 and 1999 ballot initiatives MA 1993 ballot initiative Several others since Others devote portion of MSA or other settlement revenues to comprehensive programs Comprehensive programs support a variety of activities: Anti-smoking advertising Quitlines and other cessation support School based prevention programs Community-based cessation and prevention efforts Much more These activities can add to the impact of tax increases in promoting cessation and preventing initiation

Funding for Tobacco Prevention, FY2008 100% of CDC min.; >50% of CDC min.; 25-50% of CDC min.; <25% of CDC min.; no state funding Source: American Heart Association, et al. (2007)

$3.00 Per Capita Funding for State Tobacco Control Programs D ollars per capita (May 2006 dollar $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Year

State Tobacco Control Funding as Percentage of CDC Recommended Minimum, FY00-FY06 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY00 FY01 FY02 FY03 FY04 FY05 FY06

21 Per Capita Funding for Massachusetts Tobacco Control Programs D o lla r s p e r c a p ita (D e c 2 0 0 7 d o lla r s ) 17 13 9 5 1 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006-3 Year

Research Findings Comprehensive Programs and State Cigarette Sales Higher spending on tobacco control efforts significantly reduces cigarette consumption Marginal impact of tobacco control spending greater in states with higher levels of cigarette sales per capita; average impact significantly higher in states with larger programs Disaggregated program spending suggests that impact of programs focusing on policy change is greater than spending on other programs Sources: Farrelly, Pechacek and Chaloupka. 2001; Liang et. al 2001

Research Findings Comprehensive Programs and Youth Smoking Higher spending on tobacco control efforts significantly reduces youth smoking prevalence and cigarette consumption among young smokers - estimated effects about 3 times those for adults Estimated impact of spending at CDC recommended levels: minimum: 8-9% reduction in youth smoking prevalence; maximum: over 20% reduction Estimates suggest that greatest impact is on earlier stages of youth smoking uptake Sources: Farrelly, et al. 2001; Chaloupka et. al 2001

Myths About Economic Impact of Tobacco Taxation and Tobacco Control Impact on Revenues? Impact on Jobs? Impact on Tax Evasion/Avoidance? Impact on the poor? Reality is that tobacco control is one of the best buys among health and public health interventions

Myths About Economic Impact of Tobacco Taxation and Tobacco Control Impact on Revenues? Myth: Government revenues will fall as cigarette taxes rise, since people buy fewer cigarettes Truth: Cigarette tax revenues rise with cigarette tax rates, even as consumption declines Every significant increase in federal and state cigarette taxes has resulted in a significant increase in cigarette tax revenues Sources: Sunley, et al., 2000; World Bank, 1999; Farrelly et al., 2003

T a x P e r P a c k (D e c. 2 0 0 7 d o l l a rs ) $0.75 $0.65 $0.55 $0.45 $0.35 $0.25 Federal Cigarette Tax and Tax Revenues Inflation Adjusted (Dec. 2007 dollars), 1955-2007 $14,000.00 $13,000.00 $12,000.00 $11,000.00 $10,000.00 $9,000.00 $8,000.00 $7,000.00 $6,000.00 R e v e n u e s (M i l l i o n D e c. 2 0 0 7 d o l l a rs ) $0.15 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Year $5,000.00 Federal Tax Tax Revenues Source: Tax Burden on Tobacco, 2007, and author s calculations

State Cigarette Taxes and Tax Revenues Inflation Adjusted (December 2007 dollars), 1955-2007 $0.85 $15,000.00 Tax Per P ack (Dec. 2007 dollars) $0.75 $0.65 $0.55 $0.45 $0.35 $13,000.00 $11,000.00 $9,000.00 $7,000.00 $5,000.00 Revenues (M illion Dec. 2007 dollars) $0.25 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Year $3,000.00 Avg. State Tax Tax Revenues Source: Tax Burden on Tobacco, 2007, and author s calculations

$170,000 Cigarette Excise Tax and Excise Tax Revenues, North Carolina, Inflation Adjusted, 1970-2006 $0.27 Reven u es ($1,000s o f Ju ly 200 d o llars) $145,000 $120,000 $95,000 $70,000 $45,000 $0.22 $0.17 $0.12 $0.07 E xcise T ax p er P ack (Ju ly 2006 d o llars) $20,000 $0.02 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 Year Tax Revenues Tax Source: Tax Burden on Tobacco, 2007, and author s calculations

T a x (M a y 2 006 d o lla rs $0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 $0.15 Missouri Cigarette Tax and Tax Revenues, Inflation Adjusted, 1970-2005 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 Year $280 $260 $240 $220 $200 $180 $160 $140 $120 $100 R even u e s (m illio n s o M ay 2 0 0 6 d o lla rs ) Tax Revenues Source: Tax Burden on Tobacco, 2007, and author s calculations

R e v e n u e s ( $ 1, 0 0 0 s o f D e c. 2 0 0 7 d o l l a r s ) $570,000 $530,000 $490,000 $450,000 $410,000 $370,000 $330,000 $290,000 $250,000 $210,000 Cigarette Excise Tax and Tax Revenues in Massachusets Inflation Adjusted, 1970-2007 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Year Tax Revenues Source: Tax Burden on Tobacco, 2007, and author s calculations Tax $1.70 $1.55 $1.40 $1.25 $1.10 $0.95 $0.80 $0.65 $0.50 $0.35 E x c i s e T a x p e r P a c k ( D e c. 2 0 0 7 d o l l a r s )

Positive Effect of Tax Increases on Revenues Results from: Low share of tax in price: state taxes account for less than 20% of price total taxes account for just over 25% of price Implies large tax increase has much smaller impact on price Less than proportionate decline in consumption: 10% price increase reduces consumption by 4% Example: Price $5.00, State tax $1.00 Doubling of tax raises price to $6.00 20% increase 20% price increase reduces sales by 8% 92% of original sales at double the tax increases revenues by more than 80%

Sustainability of Cigarette Tax Revenues Some suggest increases in revenues won t be sustained over time as consumption declines, tax evasion increases Looked at significant state tax increases over past 15 years where increase was maintained for at least 5 years Separately for states with major tobacco control programs Conclusions: All significant state tax increases resulted in significant increases in state tax revenues Nominal increases in revenues sustained over time in states without tobacco control programs Nominal revenues decline over time in states with tobacco control programs, but are significantly higher many years later than prior to tax increase

Cigarette Excise Tax Revenues, Alaska 29 cents to $ 1.00, 10/ 1/ 97 $45 $ 4 1. 4 0 $ 4 0. 7 0 $40 $ 3 5. 6 0 $35 $30 $25 $20 $ 15. 2 0 $15 $10 $5 $0 Revenues, 10/ 96- Revenues, 10/ 97- Revenues, 10/ 01- Aver age 9/97 9/98 9/02 Revenues

Cigarette Excise Tax Revenues, M ichigan 25 cents to 75 cents, 5/ 1/ 94 $600 $ 5 8 7. 2 0 $ 5 7 4. 2 0 $ 5 5 2. 0 0 $500 $400 $300 $ 2 6 8. 8 0 $200 $100 $0 Revenues, 5/93-4/94 Revenues, 5/94-4/95 Revenues, 5/01/4/02 Average Revenues

$300.0 $250.0 Cigarette Tax Revenues, Massachusetts, FY1996-FY2002 51 cents to 76 cents per pack, 10/1/96 $230.3 $294.2 $269.0 $276.0 $200.0 M illio n D o llars $150.0 $100.0 $50.0 $0.0 FY96 FY98 FY02 Avg FY98-02 Source: Tax Burden on Tobacco, 2007, and author s calculations

$450.0 Cigarette Tax Revenues, Massachusetts, FY2002-FY2007, 76 cents to $1.51 per pack, 7/25/02 $443.1 $419.7 $423.1 $400.0 $350.0 M illio n D o llars $300.0 $250.0 $200.0 $269.0 $150.0 $100.0 $50.0 $0.0 FY02 FY03 FY07 Avg FY03-07 Source: Connolly, unpublished data, and author s calculations

Myths About Economic Impact of Tobacco Taxation and Tobacco Control Impact on Jobs? Myth: Higher tobacco taxes and tobacco control generally will result in substantial job losses Truth: Money not spent on tobacco will be spent on other goods and services, creating alternative employment Presence does not imply dependence Many countries/states will see net gains in employment as tobacco consumption falls Source: Jacobs, et al., 2000; Chaloupka et al., in press; Warner et al., 1994, 1996

0.4000% Tobacco Farming and Manufacturing as Share of Gross Domestic Product, United States 0.3500% 0.3000% Percentage 0.2500% 0.2000% 0.1500% 0.1000% 0.0500% 0.0000% 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Year Tobacco Farming Tobacco Manufacturing Tobacco Farming and Manufacturing Source: Chaloupka et al., 2007

4.5000% Tobacco Farming and Manufacturing as Share of Gross State Product, 2000 4.0000% 3.5000% 3.0000% Percentage 2.5000% 2.0000% 1.5000% 1.0000% 0.5000% 0.0000% AK AR CA CT DE GA IA IL KS LA MD MI MO MT ND NH NM NY OK PA SC TN UT VT WI WY State Tobacco Farming Tobacco Manufacturing Tobacco Farming and Manufacturing

Myths About Economic Impact of Tobacco Taxation and Tobacco Control Impact on Jobs? Warner et al., JAMA, 1996; Warner and Fulton, JAMA, 1994 For Michigan (1994 study), overall employment rises as tobacco consumption falls For US (1996 study): 8 non-tobacco regions: employment rises as tobacco consumption falls Tiny decline in employment in tobacco region as tobacco consumption falls nationally Several state specific studies (including NH, VA, MD) find no negative impact on employment from tobacco tax increases or other tobacco control efforts Similar evidence from several other countries

Myths About Economic Impact of Tobacco Taxation and Tobacco Control Impact on Tax Evasion? Myth: Tax evasion negates the effects of increases in tobacco taxes Truth: Even in the presence of tax evasion, tax increases reduce consumption and raise revenues Extent of tax evasion often overstated Other factors important in explaining level of tax evasion Effective policies exist to deter tax evasion Sources: Joossens, et al., 2000; Merriman, et al., 2000

Canada Sharply Reduced Taxes in 1993 Real price per pack (USD) 12 10 8 6 4 2-1 1989 1990 1991 1992 Tax reduced in an attempt to counter smuggling I V 1993 1994 1995 100 90 80 70 60 50 40 30 20 10 0 Annual cigarette consumption per capita (in packs) Real Price Consumption Sources: Joossens, et al., 2000; Merriman, et al., 2000 Source: World Bank, 2003

Sweden Reduced Cigarette Taxes by 17% in 1998 Million SKE Cigarette Tax Revenue and Consumption in Sweden, 1970-1998 7000 6000 5000 4000 3000 2000 1000 0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 80 70 60 50 40 30 20 10 0 pack/capita TaxesMillion SKE cigarette/pack Source: World Bank, 2003

Cook County Cigarette Tax and Tax Revenues - FY01-FY06 $1.75 $1.55 $1.35 $225,000,000 $205,000,000 $185,000,000 $165,000,000 T a x p e r P a c k $1.15 $0.95 $0.75 $0.55 $0.35 Chicago tax rises from 16 to 48 cents Chicago tax up to 68 cents, 1/1/06 Chicago smoking ban, 1/16/06 $145,000,000 $125,000,000 $105,000,000 $85,000,000 $65,000,000 $45,000,000 T a x R e v e n u e s $0.15 2001 2002 2003 2004 2005 2006 Fiscal Year $25,000,000 Tax Revenues

R e v e n u e s ($ 1, 0 0 0 s o f D e c. 2 0 0 7 d o l l a r s ) $490,000 $450,000 $410,000 $370,000 $330,000 $290,000 $250,000 Cigarette Excise Tax and Tax Revenues in Massachusets Inflation Adjusted, 1991-2007 $1.70 $1.55 $1.40 $1.25 $1.10 $0.95 $0.80 $0.65 $0.50 E x c i s e T a x p e r P a c k (D e c. 2 0 0 7 d o l l a r s ) $210,000 1991 1994 1997 2000 2003 2006 Year Tax Revenues Tax Source: Tax Burden on Tobacco, 2007, and author s calculations $0.35

Myths About Economic Impact of Tobacco Taxation and Tobacco Control Extent of Tax Evasion? International Tobacco Control Policy Evaluation Study Longitudinal cohort study of smokers in many countries Original 4-country study focused on US, UK, Canada and Australia Added Ireland, Malaysia, Thailand, China, Korea; others in preparation/planning Approximately 2,000 smokers surveyed in each country in each wave Detailed information collected on smoking behavior and variety of related issues Cigarette purchase patterns/sources

8.0% Percent of Smokers' Last Cigarette Purchase from Untaxed or Lower Taxed Sources 7.0% 6.0% 5.0% Percent 4.0% 3.0% 2.0% 1.0% 0.0% Oct-Dec, 2002 May-Sep, 2003 June-Dec, 2004 Oct 2005-Jan 2006 Reservations Direct Other Jurisdiction Other Source: International Tobacco Control Policy Evaluation Study, US Survey, Waves 1-4

Efforts to Curb Tax Evasion Many focused on Internet, phone and mail order sales: Outright ban on direct sales (e.g. New York state policy Major shipping companies (e.g. UPS, Federal Express) agree not to ship cigarettes to consumers USPS hasn t established similar policy Major credit card companies agree to ban use of credit cards for direct cigarette purchases States apply Jenkins Act to identify direct purchasers and to collect taxes due Promising approach based on early data from several states MA collected over $4.6 million in FY07

Efforts to Curb Tax Evasion Reservation sales similar focus in some states Some states (e.g. MN) impose tax on reservation sales with refund to reservation residents Other states (e.g. WA) enter into compacts with tribes that result in comparable taxes imposed on reservation sales with most/all of revenues kept by tribe Others apply different tax stamps for cigarettes sold to residents and non-residents of reservations Quota for expected resident consumption

Efforts to Curb Tax Evasion High-Tech Efforts Adoption of sophisticated tax stamps Harder to counterfeit Contain information allowing better tracking of cigarettes through distribution channels Easier to implement enforcement actions California: Adopted 2002; fully implemented 2005 Coupled with better licensing standards Can be examined with hand-held scanners Thousands of compliance checks, hundreds of citations Generated over $124 million in revenues during 20 month period (mid-2004 through late 2005)

Myths About Economic Impact of Tobacco Taxation and Tobacco Control Regressivity? Myth: Cigarette tax increases will negatively impact on the lowest income populations Truth: Poor smokers bear disproportionate share of health consequences from smoking and are more responsive to price increases Should consider progressivity or regressivity of overall fiscal system Negative impact can be offset by use of new revenues to support programs targeting population or protect funding for current programs

Conclusions Substantial increases in tobacco excise taxes lead to large reductions in tobacco use and, in the long run, reduce the public health toll caused by tobacco use. Additional reductions in overall smoking and in the prevalence of youth smoking result when tax increases are coupled with comprehensive tobacco control efforts. Arguments about economic consequences of tobacco control and tax increases misleading, overstated, or false http://www.impacteen.org http://www.tobaccoevidence.net http://www.uic.edu/~fjc fjc@uic.edu