Friday, March 20, 2009

A snag with Increased taxes on cigarettes

Jim Power’s recent report on behalf of the Irish Cancer Society, ASH and the Irish Heart Foundation, according to media reports, argued for a sharp increase in taxes on cigarettes. See

http://www.irishheart.ie/iopen24/calls-increase-price-cigarettes-n-200.html

This has generated a great deal of comment including some criticism by columnist Noel Whelan pointing out the obvious problem of increased cross-border shopping/smuggling. The argument for such taxes is simple: cigarettes are price responsive so a tax on them, by reducing demand, should lead to better health outcomes and generate some much needed tax revenue. A win-win situation then? Not necessarily since advocates of the tax increase miss an essential point. A little behavioural economics (not to mention common sense) goes a long way here. Leaving side the cross border shopping issue a deeper problem is that while the number of cigarettes smoked may be responsive to price (& hence tax) so too is smokers’ behaviour. In particular there is good evidence that in response to increased excise taxes, smokers will smoke more intensively thereby extracting more nicotine from cigarettes. Evidence from epidemiology suggests that smokers can regulate the amount of nicotine extracted from a given cigarette by varying the number of puffs and the degree and length of inhalation. Smoking a cigarette more intensively, up to the filter, leads an individual to be exposed to more dangerous chemicals. Moreover not all cigarettes are the same and there is also good evidence that smokers respond to increased taxes by switching to brands with higher tar and nicotine yields.
The idea that smokers compensate for higher prices by extracting more nicotine is not simply a theoretical possibility but has been shown in an important study by Adda and Cornaglia in the American Economic Review (2006). When individuals inhale nicotine it is metabolized into cotinine which can be measured in saliva samples. Using US data, they find that in response to tax increases, smokers fully compensate for consuming fewer cigarettes with increased smoking intensity thereby keep nicotine levels constant. While their estimates may be at the pessimistic end of the scale the basic point is uncontroversial: it is not sufficient to simply look at the number of cigarettes smoked. Ian Irvine’s paper ( http://ideas.repec.org/p/ucd/wpaper/200818.html ) has a somewhat different take on this.
Of course if taxes cause individuals to stop smoking then there will be a reduction in nicotine although this will reduce tax revenues not increase them. In short, the prospects for such tax increases to lead to better health outcomes and more tax revenue are far from clear.





5 comments:

Martin Ryan said...

This is definitely an interesting angle on the tobacco-taxation debate...

irvinei said...

Kevin Denny's idea on tobacco use should be taken seriously. Toxicology research has long indicated that the correlation between the number of cigarettes smoked and the quantity of cotinine (a nicotine derivative) in
the saliva or bloodstream of smokers is quite weak. This suggests that smokers compensate in some measure for higher prices by smoking their cigarettes more intensively. If I disagree with the paper published by professors Adda and Cornaglia, and referenced by Dr Denny, it is only in the degree of that compensation. Much reamins to be learned.

From a Canadian perspective I must also side with Denny's warning about the consequences of well intentioned tax hikes. When prices are already high - as they are in Ireland and Canada (about nine dollars Canadian on average, or between five and six Euro per pack) - the strongest consequence of further hikes may be to make illicit activity more profitable. In the provinces of Quebec and Ontario at the present time,
about one third of the market is accounted for by illegal cigarettes.
Higher prices may deter a few more smokers, but at the cost of driving
many of them to the illegal market and strenghtening organized crime.

Kevin Denny said...
This comment has been removed by the author.
Martin Ryan said...

In relation to the possibility that further tax hikes may make illicit activity more profitable, there was a debate on the Vincent Browne show last night about making tobacco illegal:

http://www.tv3.ie/videos.php?video=6998&locID=1.65.169

Martin Ryan said...

You can also view here a debate on the VB show about alcohol taxation:

http://www.tv3.ie/videos.php?video=6999&locID=1.65.169&page=1

Dr. Joe Barry rolled out some interesting excise stats. I also found out that the Minister of State for Health owns a pub.