Theoretically, the tobacco industry's huge $246 billion settlements with the states over medical costs associated with smoking will benefit Americans not only by taking pressure off taxpayers but also by improving their future health. That's because cigarette demand is sensitive to price changes, and the settlements have sparked some of the largest tobacco price rises in history.
In the past 17 months, average cigarette prices in the U.S. have jumped 40%. Since studies indicate that a 10% price rise tends to induce a 3% to 5% reduction in per capita consumption of cigarettes, the potential health benefits of the latest round of price increases appear to be substantial.
Unfortunately, they're less substantial than they seem, argue William N. Evans of the University of Maryland and Matthew C. Farrelly of the Research Triangle Institute. Medical research shows that people given cigarettes with lower tar and nicotine content often change their smoking behavior to maintain their intake--by puffing more often or inhaling more deeply. Writing in the Rand Journal of Economics, the two economists provide evidence that smokers also adjust their buying patterns to compensate for price increases.
Analyzing detailed survey data covering some 22,000 people from 1979 to 1987, they find that smokers in high-tax states tend to buy fewer cigarettes, but to smoke ones that are longer and higher in tar and nicotine than those purchased by smokers in low-tax states. And smokers in states that have raised taxes significantly also tend, over time, to switch to more powerful smokes.
To be sure, roughly half of the drop in demand caused by price hikes can be attributed to the fraction of the population who quit smoking. But Evans' and Farrelly's point is that the behavior of those who continue to smoke negates a significant part of the health benefits generated by getting people to stop.
Since tax hikes affect all brands of smokes, it's predictable that many smokers would switch to stronger brands while economizing by smoking fewer cigarettes. Indeed, the study indicates that the average daily tar intake of those who keep on smoking remains roughly the same after they cut down.
Among young adults age 18 to 24, however, the researchers find that the tendency to switch to stronger smokes is so pronounced that their average tar and nicotine intake actually rises. And since young smokers are also those most likely to quit as a result of higher prices, this finding is particularly troubling. It suggests that the future health problems of young continuing smokers could offset as much as half of the health gains anticipated for those in their age group who are induced to quit.
If governments really want to use taxes to improve health and deter smoking, conclude Evans and Farrelly, they should tie tax rates directly to the tar content of cigarettes.