High cigarette taxes and obesity

July 31, 2012

Free Market Foundation

(Creating a new problem with regulation aimed at another)

Economists are increasingly applying their tools to measure how monetary incentives, or disincentives, affect all sorts of human behaviour and hence the ability of government policy to alter it. And they’ve been wondering whether high cigarette taxes, which are intended to encourage people to quit smoking, may have the unintended effect of redirecting them from one unhealthy behaviour to another.

According to economic consultants William Orzechowski and Rob Walker:

The price of a pack of cigarettes rose to $3.37 a pack in 2001 from 63 cents in 1980, thanks in large measure to various state and federal tax increases; adjusted for inflation, that’s a 164 per cent gain.

And smokers responded the way any economically rational consumer would, despite the fact that many felt they were addicted: they stopped using the product as it became more expensive.

Broadly speaking, says Michael Grossman, an economics professor at the Graduate Centre of the City University of New York, a 10 per cent increase in the price of cigarettes leads to a 5 per cent reduction in cigarette consumption.

But the fear of gaining weight as a result of quitting may have discouraged some smokers from stopping and apparently with good reason. In a 2004 study, Grossman, along with Shin-Yi Chou of Lehigh University and Inas Rashad of Georgia State University, mined state-by-state behavioural surveys from 1984 to 1999 to get to the root causes of rising obesity.

While they found that the prevalence of fast-food restaurants was responsible for most of the climb, they concluded that the decline in smoking accounted for about 20 per cent of it.

Overall, they found that each 10 per cent increase in the real price of cigarettes produces a 2 per cent increase in the number of obese people, other things being equal.

Source: Daniel Gross, Cigarettes, Taxes and Thin French Women, New York Times, July 24, 2005.

For text: http://www.nytimes.com/2005/07/24/business/yourmoney/24view.html

For more on Behavioural Effects of Taxes: http://www.ncpa.org/iss/tax/

FMF Policy Bulletin/ 02 August 2005