Economics of Tobacco:
Myths and Realities
Kenneth E. Warner, PhD
Avedis 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 cost
in 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
180
2900
160
2700
140
2500
2300
120
2100
100
1900
80
1700
1500
1970
60
1975
1980
1985 1990
1995
Year
consumption
price
2000
Price (1982/84 cents)
Cigarettes per capita
3100
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.
Cigarette tax rate
Cigarette tax renenue
2000
1998
1996
6.5
6
0.20
5.5
5
0.15
4.5
4
0.10
3.5
0.05
3
2.5
0.00
2
Real cigarette tax revenue (billions of 1982/84 $)
Year
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0.25
1968
1966
1964
1962
1960
Real cigarette tax rate per pack (1982/84 cents)
0.30
Federal cigarette tax rate &
cigarette tax revenue in the US
1960-2000
7
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.