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, Year Cigarettes per capita Price (1982/84 cents) consumptionprice

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.

Federal cigarette tax rate & cigarette tax revenue in the US Year Real cigarette tax rate per pack (1982/84 cents) Real cigarette tax revenue (billions of 1982/84 $) Cigarette tax rateCigarette tax renenue

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.