Economics of Tobacco:Myths and Realities

Kenneth E. Warner, PhDAvedis Donabedian Distinguished

University Professor of Public Health

University of Michigan, USA

November 7, 2002

Key to the myths

TI = tobacco industry myth

TC = tobacco control community myth

Myth #1 (TI)(the industry’s favorite)

Tobacco is crucial to the economy. Without tobacco growing, cigarette manufacturing, and distribution and sale of tobacco products, a state’s or country’s economy will suffer job losses, falling tax revenues, and growing trade deficits.

When and how the myth is used

• Whenever governments consider policy that would discourage tobacco consumption…especially in non-tobacco states and countries.

• Intent: to frighten officials into believing that, regardless of their health benefits, tobacco control measures would exact a huge economic toll.

Message

• If government adopts policy x, cigarette sales will drop.

• People will lose jobs as a consequence (tobacco farmers, manufacturing plant employees, wholesalers, retail clerks).

• The economy will suffer from lost tax revenues, including (where appropriate) income and sales taxes associated with reduced spending by the newly unemployed.

Reality...

• A significant economic presence does not imply significant economic dependence.

• Spending on tobacco is rarely important to an economy. – Money not spent on tobacco will be spent on

other goods and services instead, thereby creating a comparable number of jobs.

• Real costs = costs of transition to alternative products. – Given the addictiveness of tobacco, the

transition necessarily occurs very slowly (cigarette consumption declining 1-2% per year in developed countries).

Case studies• In Michigan, a non-tobacco state, employment

increases as tobacco consumption declines. [Warner and Fulton, JAMA, 1994]

• In the U.S., employment would rise in all 8 non-tobacco regions (44 states) if tobacco consumption fell. [Warner et al., JAMA, 1996]

– Only in the 6-state tobacco bloc would employment fall, and by a tiny fraction of state employment.

• Employment gains in Scotland, UK, South Africa, and Bangladesh; falls in Canada and Zimbabwe. [Jacobs et al., Ch. 13 in Jha and Chaloupka, eds., Tobacco Control in Developing Countries (Oxford, 2000)]

Principal transitional costin tobacco states and countries

• Tobacco farmers not be thrown out of work. • Rather, fewer children of tobacco farmers

would go into tobacco farming.

[Schelling, Preventive Medicine, 1986]

An additional economic benefit of reduced spending on tobacco

• Savings will accrue in health care spending, fire fighting, equipment maintenance and cleaning, etc.

Myth #2 (TC)(tobacco control community’s favorite)

Tobacco imposes an enormous health care cost on society. Decreasing smoking will save billions of dollars in smoking-produced health care costs each year.

When and how the myth is used

• Whenever governments consider policy that would discourage tobacco use.

• Intent: to convince officials that the policy would produce major economic benefits at the same time that it benefits the public’s health.

Reality...

• Smoking-produced illness does account for a significant share of health care costs, e.g., approximately 12% in the U.S. [Miller et al., Public Health Rep, 1998]

• However, in the absence of smoking, the elderly population would grow, as would old-age chronic disease costs.

Net impact

• On balance, costs likely would fall, but only modestly. Net savings would be small. [Warner et al., Tobacco Control, 1999]

• TC community should stick to the real reason to combat smoking: its devastating health effects.

Myth #3 (TI)

A large tax increase is dangerous because it will reduce government revenues by decreasing legal cigarette sales. This will result due to decreased smoking and increased smuggling of lower-priced cigarettes from neighboring states or countries.

When and how the myth is used

• Whenever governments consider a cigarette excise tax increase.

• Intent: to frighten officials into believing that a policy intended to increase revenue will do the opposite, and that it will introduce organized crime into the state or country.

Reality,with regard to cigarette sales...

• Cigarette taxation will reduce cigarette sales.– Increasing price is the most effective means of

decreasing cigarette smoking, especially among children.

– 10% price increase will decrease cigarette consumption 4% in developed countries, 8% in developing countries.

– Smoking among children will fall by about twice as much. [Chaloupka et al., Ch. 10 in Jha and Chaloupka, 2000]

Real cigarette prices & per capita consumption US, 1970-2000

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Year

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198

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ent

s)

consumption price

Reality with regard to revenues...

• Increased taxes invariably increase government revenues. – The percentage decline in cigarette

consumption is smaller than the percentage increase in price that induces it.

– Further, tax is only a fraction of price, so a given tax increase will cause a far smaller decrease in cigarette sales.

Federal cigarette tax rate & cigarette tax revenue in the US

1960-2000

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0.05

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0.30

1960

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Year

Re

al c

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rette

tax

rate

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982

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nts

)

2

2.5

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3.5

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4.5

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tax

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of 1

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$)

Cigarette tax rate Cigarette tax renenue

Reality with regard to smuggling...• Function of many forces

– Price but one.

– Others likely far more important• a state’s or country’s general tolerance for corruption• its specific efforts to combat smuggling (use of unique

tax stamps, enforcement, etc.).

– Informal cross-border purchases (“buttlegging”) accounts for a small share of in-state tax avoidance.

[Joossens and Raw, BMJ, 2000]

Myth #4 (TI)

Even if a tax increase would raise government revenues and decrease smoking, it is fundamentally unfair because its burden would fall disproportionately on the poor.

When and how the myth is used

• Whenever governments consider a cigarette excise tax increase.

• Intent: to appeal to officials’ concern for the welfare of the least privileged in society, and to their basic sense of “fairness.”

Reality...• Cigarette taxes are regressive.

– A larger proportion of the poor smoke.

• However, a tax increase may produce a progressive impact– because the rich decrease their smoking

only slightly in response to a price increase

– the poor decrease theirs substantially. [Townsend et al., BMJ, 1994]

Furthermore...

• Health benefit of a tax increase is distinctly progressive.

• States and countries can compensate in part for any tax regressivity– e.g., by funding cessation services and

pharmaceuticals for poor smokers.