Cigarette Consumption in Different U.S. States, 1955–1998: An Empirical Analysis of the Potential Use of Excise Taxation to Reduce Smoking

The use of excise taxation as a tool for financing part of Medicaid and national health care costs as well as for discouraging smoking behavior was a major political issue in the 1980s and early 1990s. It failed to gain Congressional support despite a significant increase in both federal and most state tax rates over the past twenty years. Annual data and OLS techniques are used to analyze the demand for cigarettes in the 50 states and the District of Columbia over the period from 1955 to 1998. Results show the demand for cigarettes to be relatively price inelastic. However, the estimates indicate more elasticity for high tax states than for low tax states. The price inelastic coefficient of the aggregate demand suggests that the main impact of taxation is likely to result in increased revenues to states rather than in directly reducing tobacco usage. The ultimate impact on smoking usage depends on how these increased revenues are spent and whether they become directed at smoking reduction. Cigarette demand is also found to be income inelastic, which implies that the tobacco industry has been growing less rapidly or even declining relative to the rising trend of the per capita disposable personal income in many states.