Economics of Tobacco Sales

Economics of Tobacco Sales

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H1 States with Smoking Bans and Cigarette Sales
Each year 440,000 people die, in the United States alone, from the effects of cigarette smoking (American Cancer Society, 2004). As discussed by Scheraga & Calfee (1996) as early as the 1950’s the U.S. government has utilized several methods to curb the incidence of smoking, from fear advertising to published health warnings. Kao & Tremblay (1988) and Tremblay & Tremblay (1995) agreed that these early interventions by the U.S. government were instrumental in the diminution of the national demand for cigarettes in the United States. In more recent years, state governments have joined in the battle against smoking by introducing antismoking regulations.
In a research article by Gallet (2004), several aspects of the clean indoor-air laws were closely examined. Set apart from other literature on the same topic, Gallet (2004) proposed that the degree of enforcement of these laws was just as important as the laws themselves. States that maintained the most restrictive clean-air laws encouraged much more competition within the cigarette industry; hence prices were adjusted closer to marginal cost which caused the availability of supply to increase (Gallet, 2004). Conversely, Keeler, Barnett, Manning, & Sung (1996) concluded that the price adjustment closer to marginal demand could be explained as an attempt to compensate for the reduction of demand caused by the antismoking laws. Regardless of the opinions of the papers on this aspect of the clean indoor-air laws, both agreed that state regulations that prohibit or limit smoking in public places decreased the cigarette demand.
Extraneous variables, excluding state smoking restrictions, may influence state cigarette sales. State cigarette sales may be influenced by “bootlegging,” identified as the crossing of state lines to purchase cigarettes in a state that sells cigarettes at a less expensive price (Gallet, 2004; Meier & Licari, 1997). Gallet (2004) identified “bootlegging” as Nprice, or the minimum neighbor state price ($). As stated previously, Gallet (2004) examined not only states with clean indoor-air laws, Clean1, but also the degree to which these laws were enforced within the individual states, Clean2. The consensus of the reviewed literature, those both including and excluding the extraneous variable, found that the institutions of state smoking bans affect cigarette sales.
The results of this study are consistent with the overall literature’s findings (Gallet, 2004; Meirer & Licari, 1997) that states with smoking bans have a decrease in cigarette sales. However, caution is warranted in the true reliability of the data presented in this study, because of the nature of the data.

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The data is representative of only two years; the lack of longitudinal information makes it difficult to gage the reliability of the results as a predictor of previous or future year’s cigarette sales. Another limitation of the data is that extraneous events, such as the degree of law enforcement, severity of punishment, or “bootlegging” where not considered as factors. Note, however, the decision to not include “bootlegging” and degree of enforcement in the parameters of this study was a conscious one. We felt that the presence of the “bootlegging” affect was apparent both before and after state smoking bans were established and therefore determined it was unnecessary to account for this activity. It was also determined that the level of enforcement was unrelated to our hypothesis. Regardless of any limitations to this study, the overall results were in agreement with the majority of literature available on the same topic.
A limitation noted of the literature was the lack of specific data prior to and immediately following the employment of state smoking restrictions. While Gallet (2004) closely examines the results of states cigarette sales following the introduction of state smoking laws, he lacks a direct comparison to sales prior to the laws. The deficient amount of collective data makes it problematical to clearly isolate the direct effect of the antismoking laws.
Implications of this study conclude that if it is the intention of states to reduce the amount of cigarettes sold, and therefore consumed, the introduction of legislation limiting or banning smoking in public places will appear in an increased amount of states across the country. In accordance with Kao & Tremblay (1988) and Tremblay & Tremblay’s (1995) testimony of the importance of the early U.S. government involvement in cigarette dealings, thus decreasing the demand for the product, we propose the same significance of state antismoking laws.
The results of the present analysis of the hypothesis’ findings are consistent with the literature in that institutions of state smoking bans affect cigarette sales. It was shown in the literature, as well as in the present analysis of the hypothesis, that the presences of state smoking bans reduce cigarette demand.

H4 States with Smoking Bans and Cigarette Tax Revenue
One in five of all deaths each year in the United States have been attributed to smoking, killing more than AIDS, suicide, alcohol, car accidents, homicide, and illegal drugs combined (American Cancer Society, 2004). As discussed by Bishop & Yoo (1985) a 1964 Surgeon General’s report, warning of the adverse health affects of smoking, led to a reduction in cigarette sales. Prior to this report taxes placed on cigarettes were intended for the sole purpose of raising revenue. After the Surgeon General’s report, however, taxes were placed on cigarettes for an additional reason, to discourage cigarette smoking (Meier & Licari, 1997).
The concept of cigarette tax derives from economic theory. A higher selling cost of cigarettes has been a direct cause of increased cigarette taxes, and as the law of supply and demand implies, fewer cigarettes will be sold (Meier & Licari, 1997). A long-standing assumption of the economic theory stated above was that an increase in cigarette tax would lower sales and thereby hurt the economy. However, according to a report by Jha, Beyer, and Heller (1999) an increase in cigarette tax actually raised cigarette tax revenue hence, causing zero harm to the economy. Tax revenue serves as the government income due to taxation. Therefore, as cigarette taxes increase so does the government income.
Since 2000, thirty-one states have increased cigarette taxes (Capehart, 2004), and additional researched has discovered these thirty-one states have also implemented smoking bans (Smoke Free World, 2005). Studies have shown that increased cigarette taxes have reduced the amount of cigarettes consumed by individuals (Brown, 1995; Meier & Licari, 1997; and Showalter, 1998). Conversely cigarette tax revenues have increased as higher taxes have been placed on cigarettes (Capehart, 2004). Most literature reviewed has considered cigarette taxes and cigarette tax revenues without regard for states with smoking bans.
From a synthesized perspective, the results of our study both coincide and differ with that of the literature (Brown, 1995; Capehart, 2004; Gallet, 2004; Meier & Licari, 1997; and Showalter, 1998). We coincide with Meier & Licari (1997) and Gallet (2004) that states with smoking bans and increased cigarette taxes have decreased cigarette sales, and differ with Showalter (1998) that states with higher cigarette taxes yield higher tax revenue. Limitations of the literature however were apparent in the absent correlation between states with smoking bans and tax revenue. While tax revenue was compared and contrasted against the amount of taxes placed on cigarettes the smoking laws were never considered.
The aspect which extends the research of our study from previous studies has been the examination of the affect states with smoking bans have on tax revenue. We introduce an innovation of thought. One may imply that states with smoking bans, which results in a decrease in cigarette sales, would have decreased tax revenue thus, adversely affecting the economy. We set out to prove the economic theory of supply and demand in relationship to state antismoking laws and state cigarette tax revenue. Our goal was to; first, determine if states with smoking bans affected cigarette tax revenue, and secondly, to determine if the affect was either positive or negative. Our results indicate that there is a negative affect on cigarette tax revenue caused by state smoking restrictions, concluding that tax revenue continued to decreases after the states issued the smoking bans.

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Scheraga, C., and Calfee, J.E. 1996. “The Industry Effect of Information and Regulation     in the Cigarette Market: 1950-1965.” Journal of Public Policy and Marketing 15:     216-226.
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Tremblay, C., and V. Tremblay. 1995. “The Impact of Cigarette Advertising on     Consumer Surplus, Profit, and Social Welfare.” Contemporary Economic Policy     13: 113-124.
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