Georgia sold 544 million packs of cigarettes in 2010, earning $201 million in state tax revenue. New research from the University of Georgia suggests a $1 tax increase would decrease consumption by 20 percent and almost triple revenues, with similar effects in nine other states.
A recent study by UGA associate professor of psychology James MacKillop, published in the journal Addiction, estimates a $1 per pack tax increase would generate a 197% increase in tax revenue, yielding almost $600 million in state tax revenues.
The study assessed 1,056 smokers in Georgia, Rhode Island and South Carolina to evaluate how estimated purchasing decisions were affected by price increases, with prices varying from free to $20 per pack.
“As price goes up, consumption goes down, which reflects how much the product is valued,” MacKillop said, who is also the director of the Behavioral Economics and Neuroeconomics Workgroup at the UGA Institute for Behavioral Research. “We looked at small intervals of price changes to better understand the relationship between cost and consumption, and so we could make specific predictions about changes in prices to inform policy makers.”
MacKillop’s research highlights the effects of price on cigarette consumption and how price changes impact tax revenues. Georgia’s current tobacco tax is .37 cents per pack, nearly the lowest in the country, and a pack of cigarettes costs on average $4.37, which is 48th nationally. Meanwhile, the Centers for Disease Control estimates the state tobacco burden from healthcare costs and lost productivity to be $9.02 for every pack sold.
The study also looked at the effects of a $1 tax increase would have on tobacco burden, estimating a savings of $976 million in Georgia. Together with additional revenue, the net effect of the tax increase was estimated to be 1.37 billion dollars.
According to MacKillop, “these findings suggest a $1 tax increase is a win-win situation.” “The price increase generates more in tax revenue and saves money in healthcare costs and lost productivity. Plus, a tax increase may ultimately create an environment where fewer people start smoking and more people try to quit smoking.”
The study looked at how tax increases would impact Alabama, Georgia, Idaho, Kentucky, Louisiana, North Carolina, North Dakota, South Carolina, Virginia and West Virginia. A $1 tax increase in North Carolina was predicted to increase revenues by $410.7 million and save $824.9 million in tobacco burden, a net effect of 1.23 billion dollars. Virginia, which sells 543 million packs per year, was predicted to generate $402.7 million dollars in additional revenue and save $677.9 million dollars in tobacco burden with a $1 tax increase, a net effect of 1.08 billion dollars.
Further, the study suggests that this is partially because of the potent effects of “left-digit” effects, in which consumers are disproportionately affected by the first digit in a product’s price.
“The areas where we saw the biggest changes were those with left-digit transitions, or prices where the whole dollar price went up,” MacKillop said. Compared to the effect of a pack price increase from $5.60 to $5.80, the decrease in cigarette consumption from $5.80 to $6 was four times larger.
“People are disproportionately affected by those prices because we tend to think of numbers in whole terms,” he said. “This has important implications for policy makers because it suggests certain price changes will have a particularly large impact.”
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The study was funded by the Robert Wood Johnson Foundation.
Writer: April Sorrow, +1 706 542 7991, email@example.com
Contact: James MacKillop, +1 706 542 3033, firstname.lastname@example.org
MacKillop J, Few LR, Murphy JG, Wier LM, Acker J, Murphy C, Stojek M, Carrigan M, and Chaloupka F. High-resolution behavioural economic analysis of cigarette demand to inform tax policy. Addiction, 107: doi: 10.1111/j.1360-0443.2012.03991.x
Addiction (www.addictionjournal.org) is a monthly international scientific journal publishing peer-reviewed research reports on alcohol, illicit drugs, tobacco, and gambling as well as editorials and other debate pieces. Owned by the Society for the Study of Addiction, it has been in continuous publication since 1884. Addiction is the number one journal in the 2011 ISI Journal Citation Reports Ranking in the Substance Abuse Category (Social Science Edition). Membership to the Society for the Study of Addiction (http://www.addiction-ssa.org/) is £85 and includes an annual subscription to Addiction.