The effects of cigarette price and tax on smokers and government revenue
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Background. Increases in cigarette price are associated with increased cessation and decreased consumption. However, smokers can compensate for higher cigarette prices, such as switching to cigarettes in the lower pricing tiers (discount cigarettes) or buying cigarettes without paying home state taxes (tax avoidance, low/untaxed cigarettes) on the Internet, from another state or from Indian reservations, to avoid high cigarette prices (price avoidance), which is important from public health viewpoints but there are relatively few studies on this topic. A recent agreement prohibits credit card payment for online cigarette transactions; however, the impact of this credit card policy has not been evaluated. This study aims to fill these research gaps by utilizing prospective data to assess the spectrum of behaviors smokers may adopt in response to higher cigarette prices, what impact these have on cessation, and what impact the credit card policy may have. Methods. Four longitudinal data sets of representative samples of smokers at the local, state, national, and international levels were examined. Each of the datasets measures smoking cessation indicators and high price and tax avoidance behaviors. Multivariate logistic regression was used to examine the association between cigarette price and use of less expensive cigarettes and smoking cessation indicators and use of stop smoking medications. Price elasticities on cessation, amount smoked, and relapse were estimated with GEE. Self-reported tax avoidance data were used to estimate the uncollected revenue in New York State and in Erie/Niagara datasets. Online cigarette purchase rates during different time periods were computed to examine if the policy affected online cigarette purchase. Results. Nationally, 21% and 4% of the smokers reported smoking discount cigarettes and low/untaxed cigarettes in 2002, respectively. Increases in cigarette prices were associated with increased switching to less expensive cigarettes, which was in turn associated with decreased quitting and decreased smoking reductions. Overall, increases in cigarette price and tax were associated with increased use of stop smoking medications and decreased daily cigarette consumption. Price elasticity was lower in communities with high levels of price and tax avoidance behaviors (cessation elasticity=-0.12, intensity elasticity=-0.13) than in those with low levels of price and tax avoidance behaviors (cessation elasticity=0.77, intensity elasticity=-0.21). The total uncollected revenue due to tax avoidance behaviors was between $28.7 million and $51.6 million in Erie/Niagara Counties in 2002 and between $419 million and $552 million in New York State in 2004. The online cigarette purchase rates dropped by about 50% after the implementation of the credit card policy, which suggests that the policy effectively decreased online cigarette sales. Conclusion. Raising cigarette price is an effective way to control smoking. However, smokers may engage in price and tax avoidance behaviors after price increase, which may in turn undermine the public health benefits and result in uncollected revenue. The credit card policy effectively decreased online cigarette sales. Future cigarette pricing policies should strive to not only increase the cost of cigarettes but also to eliminate lower priced products to maximize the public health benefit of higher cigarette prices.