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Cigarette Prices, Smoking, and the Poor, Revisited

April 2, 2008

By Farrelly, Matthew C Engelen, Mark; Franks, Peter; Jerant, Anthony F; Leigh, J Paul

We read the provocative article by Franks et al. with great interest, because it concludes that since the 1998 Master Settlement Agreement (MSA) between states and tobacco companies, there has been a “dramatic decline in the effect of cigarette pack prices on smoking participation in both lower- and higher-income individuals.”1(p1876) We were impressed with the authors’ thoughtful analytic approach but remained skeptical because their results contradict a large body of previous research. A meta-analysis examined 523 estimates of price effects and confirmed the conventional wisdom that a 10% increase in cigarette prices leads to a 4% decline in smoking.2 Half of the 4% decline typically comes from declines in smoking prevalence and half from decreased consumption. Franks et al. note that some studies “have found that smokers in general and low-income smokers in particular may be relatively insensitive to cigarette pack prices.”1(p1873) However, a close examination of the 2 published studies3,4 and 1 working paper5 in question indicates that these studies also confirm that increases in cigarette prices reduce smoking and do not provide consistent evidence that lower-income individuals are less price responsive.

Despite the careful approach by Franks et al., we urge caution for a number of reasons. First, we pursued the possibility the authors raise that the prices they used may have overstated actual prices by failing to capture price promotions after the MSA. Second, individual studies can produce varying estimates. We reanalyzed the data in Franks et al. with a few modifications. We included 2 additional years of data after the MSA and limit the pre-MSA period from 1990 to October 1998. Earlier years were dropped because too few states are represented in the BRFSS in the 1980s-as few as 15. In 1990, 45 states participated. We also examined the effects for 3 income groups: the lowest income quartile, the middle two income quartiles, and the highest income quartile. Aside from these differences, our analytic approach was nearly identical to that of Franks et al. Table 1 shows a statistically significant overall effect of cigarette prices on smoking prevalence before and after the MSA. These results do suggest that the size of the price effect has declined, but only among the middle and high income groups. A 10% increase in price would lead to a 0.9% decline in the prevalence of smoking overall, a 1.1% decline among the lowest income group, and a 0.6% decline in the 2 middle income groups. The latter effect is marginally statistically significant, although there is not a statistically significant effect for the highest income group.

From a public health standpoint, cigarette excise taxes continue to be an important option for policymakers for several reasons. First, our results confirm the large body of research that shows that increasing the price of cigarettes discourages smoking, with larger effects among low-income smokers. Second, concerns about the regressivity of cigarette excise taxes can easily be addressed, as suggested by noted health economist Kenneth Warner, by earmarking revenue from cigarette excise taxes to evidence-based smoking cessation interventions targeted to low income populations with the highest smoking rates. Such a combined policy may actually be considered a progressive health policy solution. Finally, what may appear to be modest effects of increases in cigarette prices can lead to millions of smokers quitting.

Based on the literature cited in this letter, a 25% increase in the price of cigarettes nationally would lead to a 5% decline in the prevalence of smoking. With 47 million smokers in the United States as of 2006, this decline translates to 2 million fewer smokers-a significant public health impact. With additional dedicated cessation assistance for low-income smokers, this number would increase further.

Matthew C. Farrelly, PhD

Mark Engelen, BA

About the Authors

Matthew C. Farrelly is with the Public Health and Environment Division and the Public Health Policy Research Program, RTI International, Research Triangle Park, NC, and the RTI-UNC Center of Excellence in Health Promotion Economics, Research Triangle Park. Mark Engelen is with the Public Health Policy Research Program, RTI International, Research Triangle Park.

Requests for reprints should be sent to Matthew C. Farrelly, 3040 Cornwallis Rd, Research Triangle Park, NC 27709 (e-mail: mcf@rti.org).

This letter was accepted December 13, 2007.

doi:10.2105/AJPH.2007.132647

Contributors

M.C. Farrelly conceptualized the analysis and wrote the first draft of the letter. M. Engelen contributed to all drafts of the letter and conducted all analyses.

Acknowledgments

The letter was supported by the RTI-UNC Center of Excellence in Health Promotion Economics. The Center is supported by the Centers for Disease Control and Prevention (grant 1 P30 CD000138-01).

Human Participant Protection

The study analyzed public-use data with no personally identifiable information. No institutional review board review was required.

References

1. Franks P, Jerant AF, Leigh JP, et al. Cigarette prices, smoking, and the poor: implications of recent trends. Am J Public Health. 2007;97:1873-1877.

2. Gallet CA, List JA. Cigarette demand: a meta-analysis of elasticities. Health Econ. 2003;12(10): 821-835.

3. Wasserman J, Manning WG, Newhouse JP, Winkler JD. The effects of excise taxes and regulations on cigarette smoking. J Health Econ. 1991;10:43-64.

4. Borren P, Sutton M. Are increases in cigarette taxation regressive? Health Econ. 1992;1:245-253.

5. Colman G, Remler DK. Vertical equity consequences of very high cigarette tax increases: if the poor are the ones smoking, how could cigarette tax increases be progressive? Cambridge, Mass: National Bureau of Economic Research; 2004. NBER Working Paper 10906. Available at: http://www.nber.org/ papers/w10906. Accessed November 13, 2007.

6. The Nielsen Company. Scan-Trac Data, Grocery Channel, 50 Retail Markets, 1994-2005. New York, NY: The Nielsen Company; 2006.

7. Orzechowski W, Walker RC. The Tax Burden on Tobacco. Arlington, Va: Orzechowski and Walker; 2006.

FRANKS ET AL. RESPOND

Farrelly and Engelen appear to have repeated our analyses, but have included 2 more recent years of data and used Nielsen retail price data as well as the tax burden data that we used. There are some noteworthy inconsistencies. First, despite using more years of data, their sample size was over 1 million persons smaller than ours. Second, they noted that a meta-analysis found an elasticity of -0.4, which is what we found in the earlier time period. However, the elasticity they reported throughout was much lower (range: -0.1 to -0.13). This lower elasticity is actually less than the elasticity we reported (-0.14) for poorer persons in the more recent time period. Third, despite the smaller sample size and lower elasticity, they reported the effect as statistically significant, whereas we found a larger effect not statistically significant. Fourth, the rationale for using Neilson data is that actual prices may be lower than those in the tax burden data. Thus, use of the tax burden data may underestimate elasticity. However, paradoxically, their results using Nielsen data compared with the tax burden data suggest less elasticity with the Nielsen data. The reasons for these inconsistencies are unclear, given the limited presentation of their methods. One possibility is that they ignored the clustered nature of the data (thereby overstating the statistical significance of their findings); another is that the Nielsen data are problematic.1

Beyond these methodological issues, there are some important policy implications of our findings. While higher prices may still contribute to smoking cessation (and reduced initiation), the gap between the poor and less poor in smoking is increasing. The burden of higher cigarette prices thus falls increasingly on poorer persons. Funding broad social policies (like expansion of health care coverage) through taxation aimed at a narrow, poor segment of society may be politically expedient. However, in our view, such policy is short sighted and contributes to the fragmentation of social cohesiveness. Further, if higher prices do lead to reduced smoking, then tax revenues will decline, undermining the fiscal basis of the expanded health coverage.

Peter Franks, MD, Anthony F. Jerant, MD, J. Paul Leigh, PhD

About the Authors

Peter Franks and J. Paul Leigh are with the Center for Health Services Research in Primary Care, Department of Family and Community Medicine, University of California, Davis, School of Medicine, Davis, Calif. Anthony F. Jerant is with the Department of Family and Community Medicine.

Requests for reprints should be sent to Peter Franks, MD, Center for Health Services Research in Primary Care, Department of Family and Community Medicine, University of California, Davis, School of Medicine, 4860 Y Street, Suite 2300, Sacramento, CA 95817 (e-mail: pfranks@ucdavis.edu).

This letter was accepted December 30, 2007.

doi:10.2105/AJPH.2007.132654

References

1. Tauras JA, Peck RM, Chaloupka FJ. The role of retail prices and promotions in determining cigarette brand market shares. Review of Industrial Organization. 2006;28:253-284.




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