A Preliminary Contemporary Panel Data Analysis of the Consumption Impact of Cigarette Taxation

Abstract

Abstract The adverse health effects from cigarette smoking account for an estimated 400,000 deaths annually in the U.S. Given this circumstance, the present study has two objectives. First, using a panel data set for a very recent time frame, it seeks to investigate the impact of federal plus state cigarette excise taxes (along with the influence of other factors) on the aggregate consumption of cigarettes. The study adopts a five-year state-level panel data series spanning the period 2002 through 2006. Consistent with certain previous studies, the estimates in this study find that the higher the cigarette excise tax, the lower the aggregate volume of cigarettes consumed. However, this outcome does not address the practical problem of the substitution of high nicotine cigarettes for low nicotine cigarettes in light of a significant cigarette tax hike. This circumstance leads to the second objective of this study, namely, to formally propose a general form/template for a cigarette excise tax that is tied directly to each cigarette brand’s nicotine and tar content.