How cigarette excise tax pass-through to prices responds to the uptake and evolution of e-cigarettes (ECs)

Abstract

BackgroundHow excise taxes are passed through to prices determines whether tax policies will be effective in changing smoking behaviours. Though previous literature has documented that cigarette taxes are overly shifted to prices, there is limited evidence on how cigarette tax pass-through to prices is affected by the uptake and evolution of e-cigarettes (ECs) in the US market.ObjectiveThis study investigates how cigarette excise tax pass-through rate varied by price levels (the 25th, 50th, and 75th percentile prices) and the uptake and evolution of ECs.MethodsTax pass-through rates were assessed using ordinary least squares regressions while controlling for state, year and month fixed effects. Different trends were then tested for the pre-EC uptake era (2006–2011), EC uptake era (2012–2016) and the evolution of nicotine salt-based ECs era (2017 and later).FindingsCigarette excise taxes were fully shifted to the 25th and 50th percentile prices and overly shifted to the 75th percentile prices at a 1:1.1 rate. While cigarette excise taxes had a continuous impact on raising prices, the tax pass-through rates were lower for lower priced cigarettes, and states imposed lower taxes.ConclusionsContinuing to raise cigarette taxes may be needed to create financial incentives to encourage people who smoke to switch to ECs. In addition, continuing to raise cigarette taxes and additional pricing policies such as price promotion restrictions are needed to increase retail prices and reduce price minimisation opportunities.