[Congressional Record Volume 143, Number 95 (Tuesday, July 8, 1997)]
[Senate]
[Pages S7025-S7027]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




     ECONOMISTS ENDORSE RAISING TOBACCO TAXES TO CURB YOUTH SMOKING

 Mr. KENNEDY. Mr. President, as Congress considers an increase 
in the Federal cigarette tax in the budget reconciliation bill, I urge 
my coleagues to read an excellent article by economists Michael 
Grossman and Frank J. Chaloupka, both of whom have written extensively 
on the impact of tobacco taxes on teenage smoking.
  The article is entitled ``Cigarette Taxes: The Straw to Break the 
Camel's Back,'' and is published in the July/August 1997 edition of 
Public Health Reports. It finds that raising tobacco taxes would be a 
powerful weapon against youth smoking, since children have less income 
to spend on cigarettes than adults. According to Grossman and 
Chaloupka, the 43 cents per pack cigarette tax increase in the 
legislation that Senator Hatch and I introduced earlier this year would 
reduce teenage smoking by 16 percent, saving the lives of over 830,000 
children. In addition, the proceeds from the tobacco tax increase would 
be used to provide health insurance for millions of American children 
who are uninsured today.
  It's time for Congress to say ``no'' to Joe Camel, the Marlboro Man, 
and the tobacco lobby, and say ``yes'' to the Nation's children. I ask 
that the Public Health Reports article be printed in the Record.
  The article follows:

           [From the Public Health Reports, July/August 1997]

          Cigarette Taxes: The Straw to Break the Camel's Back

       (By Michael Grossman, Ph.D. and Frank J. Chaloupka, Ph.D.)


                                synopsis

       Teenage cigarette smoking is sensitive to the price of 
     cigarettes. The most recent research suggests that a 10% 
     increase in price would reduce the number of teenagers who 
     smoke by 7%. If the proposed 43-cent hike in the Federal 
     excise tax rate on cigarettes contained in the Hatch-Kennedy 
     Bill were enacted, the number of teenage smokers would fall 
     by approximately 16%. This translates into more than 2.6 
     million fewer smokers and more than 850,000 fewer smoking 
     related premature deaths in the current cohort of 0 to 17-
     year-olds. Adjusted for inflation, the current 24-cent-a-pack 
     tax costs the buyer about half of the original cigarette tax 
     of 8 cents imposed in 1951. A substantial tax hike would curb 
     youth smoking; this strategy should move to the forefront of 
     the antismoking campaign.
       These are not good times for the U.S. cigarette industry. 
     For decades, policy makers and consumer activists have 
     unsuccessfully attempted to rein in the tobacco industry. 
     Now, new legal strategies are bearing fruit, more stringent 
     regulations regarding the marketing and sales of cigarettes 
     are being implemented, and a bill to significantly increase 
     cigarette taxes has been put before the Senate. A large 
     cigarette tax complements the gains made on other fronts by 
     making cigarettes less desirable to teenagers, the next 
     generation of addicts.
       Numerous studies have shown that roughly 90% of smokers 
     begin the habit as teenagers. Each day, approximately 6000 
     youths try a cigarette for the first time, and about half of 
     them become daily smokers. Among people who have ever smoked 
     daily, 82% began smoking before age 18. Thus, cigarette 
     control policies that discourage smoking by teenagers may be 
     the most effective way of achieving long-run reductions in 
     smoking in all segments of the population.
       The upward trend in teenage smoking in the 1990s is 
     alarming to public health advocates. Between 1993 and 1996 
     the number of high school seniors who smoke grew by 14%. At 
     the same time the number of tenth grade smokers rose by 23%, 
     and the number of eighth grade smokers rose by 26%.
       The FDA regulations approach the problem of youth smoking 
     by curtailing access to cigarettes and attempting to reduce 
     the appeal of cigarettes by putting limits on cigarette 
     advertising. Increased taxation, which results in higher 
     prices, is another means to accomplish the goal of 
     discouraging young people from smoking. Unfortunately, 
     increases in the Federal excise tax rate on cigarettes have 
     not been motivated by a desire to curtail smoking. The 
     purpose of each of the three tax increases since 1951 was to 
     raise tax revenue or reduce the Federal deficit rather than 
     to discourage smoking. The tax was fixed at 8 cents per pack 
     between November 1, 1951, and the end of 1982. It rose to 16 
     cents per pack effective January 1, 1983, as part of the Tax 
     Equity and Fiscal Responsibility Act of 1982. The tax was 
     increased further to 20 cents per pack effective January 
     1, 1991, and to 24-cents per pack effective January 1, 
     1992, part of the Omnibus Budget Reconciliation Act of 
     1990. But if the tax had simply been adjusted for 
     inflation each year since 1951, it would be 47 cents per 
     pack today: therefore, in effect today tax is much lower 
     than the 1951.
       A 43-cent tax hike is proposed in a bill introduced by 
     Senators Orrin G. Hatch and Edward M. Kennedy in this 
     Congress. As with past tax increases, the primary focus is 
     not to discourage teenage smoking. The goal of the tax 
     increase in the Hatch-Kennedy Bill is to finance health 
     insurance for low-income children who are currently 
     uninsured. Two-thirds of the estimated annual $6 billion 
     increase in tax revenue would be allocated for grants to the 
     states to provide health insurance for children below the age 
     of 15 whose low-income working parents do not qualify for 
     Medicaid. The remaining one-third would be applied to 
     reducing the Federal deficit.
       The industry has known and public health advocates have 
     come to realize, however, that an increase in the cigarette 
     tax can influence the behavior of smokers. The American 
     Cancer Society, the Robert Wood Johnson Foundation, and other 
     members of the antismoking lobby are supporting a proposal to 
     raise state cigarette tax rates to a uniform 32 per pack 
     nationwide in the next few years, from the current range of 
     2.5 cents in Virginia to 92.5 cents in Washington State. 
     According to John D. Giglio, manager of tobacco control 
     advocacy for the American Cancer Society: Raising tobacco 
     taxes is our number one strategy to damage the tobacco 
     industry. The . . . industry has found ways around everything 
     else we have done, but they can't repeal the laws of 
     economics.
       The cigarette industry's recognition of the potency of 
     excise tax hikes as a tool to discourage teenage smoking is 
     reflected in a September 1991 Philip Morris internal 
     memorandum written by Myron Johnson, a company economist, to 
     his boss, Harry G. Daniel, manager of research on smoking by 
     teenagers. The memo was written in reaction to a Natural 
     Bureau of Economic Research (NBER) report authored by Michael 
     Grossman, Eugene M. Lewit, and Douglas Coate, which was later 
     published in the Journal of Law and Economics. In the memo 
     Johnson wrote: ``Because of the quality of the work, the 
     prestige (and objectivity) of the NBER, and the fact that the 
     excise tax on cigarettes has not changed in nearly 30 years 
     we need to take seriously their statement that . . . if 
     future reductions in youth smoking are desired, an increase 
     in the Federal excise tax is a potent policy to accomplish 
     this goal. (Grossman et al.) calculate that . . . a 10% 
     increase in the price of cigarettes would lead to a decline 
     of 12% in the number of teenagers who would otherwise smoke.


                             why taxes work

       There are strong logical reasons for expecting teenagers to 
     be more responsive to the price of cigarettes than adults. 
     First, the proportion of disposable income that a youthful 
     smoker spends on cigarettes is likely to exceed the 
     corresponding proportion of an adult smoker's income. Second, 
     peer pressure effects are much more important in the case of 
     youth smoking than in the case of adult smoking. 
     Interestingly, peer pressure has a positive multiplying 
     effect when applied to teenage smokers: a rise in price 
     curtails youth consumption directly and then again indirectly 
     through its impact on peer consumption (if fewer teenagers 
     are smoking, fewer other teenagers will want to emulate 
     them). Third, young people have a greater tendency than 
     adults to discount the future.
       The ``full'' price to an individual of a harmful smoking 
     addiction is the price of cigarettes plus the monetary and 
     emotional costs to the individual of future adverse health 
     effects. The importance and value placed on these future 
     health effects varies among individuals and especially with 
     age. Becker, Grossman, and Murphy have shown that young 
     people are more responsive to the price of cigarettes than 
     adults because they give little weight to the future, while 
     adults are more sensitive to perceived or known future 
     consequences. Young people may underestimate the health 
     hazards of and the likelihood that initiation of this 
     behavior leads to long-term dependency. And, even when fully 
     informed, teenagers have a tendency to give a great deal of 
     weight to present satisfaction and very little weight to the 
     future consequences of their actions.
       Becker and Mulligan argue that children become more future 
     oriented as the result of

[[Page S7026]]

     an investment process. Many of the activities of parents and 
     schools can be understood as attempts to make children care 
     more about the future. Some parents and schools succeed in 
     these efforts; but others do not. These failures are 
     particularly troublesome because of the two-way causality 
     between addiction and lack of a future orientation. People 
     who discount the future more heavily are more likely to 
     become addicted to nicotine and other substances. And the 
     advance health consequences of these substances make a future 
     orientation even less appealing.
       Consumers are not unaware of the dangers of smoking. A 
     survey of Viscusi suggests that both smokers and nonsmokers 
     overestimate, not underestimate, the possibility of death and 
     illness from lung cancer due to tobacco. Teenagers, who have 
     less information than adults, actually attach much higher 
     risks to smoking than the rest of the population. Other risks 
     of cigarette smoking, including the risk of becoming 
     addicted, may, however, be underestimated.
       Cigarette smokers harm others (external costs) in addition 
     to harming themselves (internal costs). The ignored internal 
     costs of smoking can interact with the external costs. A 
     striking example is smoking by pregnant teenage women, who 
     may engage in this behavior because they heavily discount the 
     future consequences of their current actions. Pregnant women 
     who smoke impose large external costs on their fetuses. 
     Numerous studies show that these women are more likely to 
     miscarry and to give birth to low birth weight infants. Some 
     of these infants die within the first month of life. More 
     require extensive neonatal intensive care and suffer long-
     term impairments to physical and intellectual development.
       The conventional wisdom argues that people who are addicted 
     to nicotine are less sensitive to price than others. 
     Therefore, adults should be less responsive to price than 
     young people because adult smokers are more likely to be 
     addicted to nicotine and if so, are likely to be more heavily 
     addicted or to have been addicted for longer periods of time. 
     The conventional wisdom that addicted smokers are less 
     sensitive to price has been challenged in a formal economic 
     model of addictive behavior developed by Becker and Murphy, 
     which shows that a price increase can have a cumulative 
     effect over time.
       Since cigarettes are addictive, current consumption depends 
     on past consumption. A current price increase has no 
     retroactive effect on ``past consumption'' and therefore 
     reduces the amount smoked by an addicted smoker by a very 
     small amount in the short run. But the size of the effect 
     would grow over time because even a small reduction in 
     smoking during the first year after a price increase would 
     also mean a reduction in smoking in all subsequent years. So, 
     for example, 10 years after a price hike, ``past 
     consumption'' would have varied over a 10-year period.
       Changes in the total number of young people who smoke are 
     due primarily to changes in the number of new smokers 
     (starts). Among adults, changes in the total number of 
     smokers occur primarily because current smokers quit (quits). 
     Clearly, quits are inversely related to past consumption--
     there are more quitters among those who have smoked the 
     least--while starts are independent of past consumption. 
     Thus, the effect of price on choosing whether to smoke should 
     be larger for young people than for adults.


                              the evidence

       Suggestive evidence of the responsiveness of teenage 
     smoking to the price of cigarettes can be found in recent 
     upward trends in smoking. In April 1993, the Philip Morris 
     Companies cut the price of Marlboro cigarettes by 40 cents. 
     Competitors followed suit. Marlboros are popular among 
     teenagers: 60% reported that Marlboro was their brand of 
     choice in 1993, while Marlboro had an overall market share of 
     23.5% in the same year. In 1993, 23.5% of teenagers in the 
     eighth, tenth, and twelfth grades smoked. In 1996, 28.0% of 
     the students in these grades smoked; this represented a 19% 
     increase over a three-year period. Yet during this period, 
     the number of smokers ages 18 years and older remained the 
     same. Some attribute this increase in teenage smoking to a 
     broad range of social forces thought to be associated with 
     increases in other risky behaviors by teenagers, especially 
     the use of marijuana. But we attribute it to a fall in 
     cigarette prices: between 1993 and 1996 the real price of a 
     pack of cigarettes (the cost of a pack of cigarettes in a 
     given year divided by the Consumer Price Index for all goods 
     for that year) fell by 13%.
       More definitive evidence of the price sensitivity of 
     teenage smoking can be found in two NBER studies that used 
     large nationally representative samples of thousands of young 
     people between the ages of 12 and 17. These studies 
     capitalized both on the substantial variation in cigarette 
     prices across states (primarily because of different state 
     excise tax rates on this good) and on other state-specified 
     factors such as parents' education and labor market status 
     that may affect the decision to smoke and the quantity of 
     cigarettes consumed. The findings of a 1981 study by 
     Grossman, Lewit, and Coate--the subject of the 1981 Philip 
     Morris internal memoradum--were used by the news media 
     throughout the 1980s and early 1990s to project the effects 
     of Federal excise tax hikes. The authors' 1996 study has been 
     cited by Senators Hatch and Kennedy as evidence that a major 
     benefit of the tax increase in their health insurance bill 
     would be to discourage youth smoking.
       The Grossman et al. 1981 study used data from Cycle III of 
     the U.S. Health Examination Survey, a survey of almost 7000 
     young people between the ages of 12 and 17 conducted between 
     1966 and 1970 by the National Center for Health Statistics. 
     The authors found that a 10% increase in the price of 
     cigarettes would reduce the total number of youth smokers by 
     12%. Yet teenagers who already smoked proved much less 
     sensitive to price: a 10% increase in price would cause daily 
     consumption to fall by only 2%.
       In our 1996 study, we used data from the 1992, 1993, and 
     1994 surveys of eighth, tenth, and twelfth grade students 
     conducted by the Institute for Social Research at the 
     University of Michigan as part of the Monitoring the Future 
     Project. Taken together, these three nationally 
     representative samples included approximately 150,000 young 
     people. We found that a 10% increase in price would lower the 
     number of youthful smokers by 7%, a somewhat smaller effect 
     than the 12% projected in the 1981 study. Consumption among 
     smokers, however, would decline by 6%, which is three times 
     larger than the decline projected in the 1981 study.
       Comparable studies of adults have found smaller effects of 
     a projected 10% price increase. In a 1982 study of people age 
     20 years and older, Lewit and Coate reported that a 10% rise 
     in price would cause the number of adults who smoke to fall 
     by 3% and a decline of 1% in the number of cigarettes smoked 
     per day by those who smoke. In a 1991 study of adult smokers, 
     Wasserman et al. found that a 10% increase in price would 
     cause the number who smoked to fall by 2% and the number of 
     cigarettes smoked per day to fall by 1% while in a 1995 study 
     Evans and Farrelly found declines of 1% in both categories. 
     Based on the most recent estimates, a 10% increase in the 
     price of cigarettes would reduce the number of teenagers who 
     smoke by 7%, while it would reduce the number of adults who 
     smoke by only 1%. Daily consumption of teenage smokers would 
     fall by 6%, while daily consumption of adult smokers would 
     fall by 1%.


                    price increases as a policy tool

       The proposed 43-cent cigarette tax hike in the Hatch-
     Kennedy Bill would, if fully passed on to consumers, raise 
     the price of a pack of cigarettes by approximately 23%. 
     According to our 1996 study, the number of teenage smokers 
     would fall by approximately 16% and the number of cigarettes 
     consumed by teenage smokers would decline by approximately 
     14%. Some of these smokers might compensate for a reduction 
     in the number of cigarettes smoked by switching to higher 
     nicotine and tar brands, inhaling more deeply, or reducing 
     idle burn time. These factors, while representing a public 
     health concern, are not relevant in evaluating the effect of 
     an excise tax hike on whether an individual chooses to smoke 
     at all.
       Since very few smokers begin smoking after the ages of 20, 
     these relatively large reductions in this total number of 
     teenage smokers imply that excise tax increases are very 
     effective ways to prevent the onset of a habitual behavior 
     with serious future health consequences. A 16% decline in the 
     number of young smokers associated with a 43-cent tax hike 
     translates into over 2.6 million fewer smokers in the current 
     cohort of 0 to 17-year-olds. Using a common estimate that one 
     in three smokers dies prematurely from smoking-related 
     illnesses, we can calculate that over time a real (adjusted 
     for inflation) 43-cent tax increase would reduce smoking-
     related premature deaths in this cohort by over $50,000. And 
     larger tax increases would result in even bigger reductions 
     in the number of young smokers and the number of premature 
     deaths.
       A tax hike would continue to discourage smoking for 
     successive generations of young people and would gradually 
     affect the smoking levels of older age groups as the smoking-
     discouraged cohorts move through the age spectrum. Over a 
     period of several decades, aggregate smoking and its 
     associated detrimental health effects would decline 
     substantially.
       The effect of a price or tax hike also grows over time 
     because of the addictive nature of smoking; a small reduction 
     in current cigarette consumption by smokers due to a tax hike 
     would decrease consumption in all future years to follow: 
     Becker, Grossman, and Murphy have estimated that each 10% 
     rise in price causes the number of cigarettes consumed by a 
     fixed population (number of smokers multiplied by cigarettes 
     consumed per smoker) to fall by 4% after one year and by as 
     much as 8% after approximately 20 years.
       Caveats. Several caveats are required in evaluating the 
     benefits of a tax hike. First, for a cigarette tax increase 
     to continue at the same level in real terms, it would have to 
     be indexed to the rate of inflation. The same objective could 
     hypothetically be accomplished by converting to an ad valorem 
     cigarette excise tax system under which the cigarette tax is 
     expressed as a fixed percentage of the manufacturer's price. 
     The latter approach has one limitation: the Congressional 
     Budget Office points out that it might induce manufacturers 
     to lower sales prices to company-controlled wholesalers to 
     avoid part of the tax.
       Second, Ohsfeldt, Boyle, and Capilouto have reported that 
     the number of males between the ages of 16 and 24 who use 
     smokeless tobacco would rise by approximately 12% if a state 
     excise tax rate on cigarettes

[[Page S7027]]

     rose by 10%. Some would view such an increase with alarm 
     because smokeless tobacco increases the risks of oral cancer 
     and other oral diseases. On the other hand, Rodu argues that 
     these elevated risks are very small and are more than offset 
     by reductions in cigarette-related cancers and heart disease. 
     The substitution of smokeless tobacco for cigarettes could be 
     discouraged by raising the Federal excise tax on smokeless 
     tobacco. But this would raise the cost of a safer nicotine 
     delivery system than cigarettes and could be viewed as an 
     unfair penalty on those who cannot give up their addiction.
       Third, in strictly financial terms, we would expect a tax 
     hike to yield higher rates of return in the short run than in 
     the long run because of its cumulative effect in reducing 
     smoking. The Becker et al. study implies that a Federal 
     excise tax rate on cigarettes of approximately $1.00 a pack 
     would maximize long-run Federal revenue from the tax at 
     roughly $13.3 billion annually approximately 10 to 20 years 
     after the new rate is in effect--only $7.6 billion more than 
     the revenue from today's 24-cent tax. Clearly, the 67-cent 
     tax in the Hatch-Kennedy Bill, which is expected to yield an 
     additional $6 billion annually for the next few years, will 
     have a much smaller yield in the long run.
       The gap between long-run and short-run tax yields 
     highlights a danger of justifying a cigarette tax increase to 
     achieve goals other than reductions in smoking. For a while, 
     public health advocates can have their cake and eat it too. 
     But after a number of years, the large cumulative reduction 
     in smoking would take a big bite out of the tax revenues 
     initially generated by the tax hike. One would hardly like to 
     see the development of a situation in which fiscal needs 
     create pressure on the governments to encourage smoking or at 
     least not discourage it. The extensive advertising campaigns 
     conducted by state-run lotteries are examples of the danger 
     of the government becoming too dependent on revenue from a 
     harmful addiction.


                               conclusion

       We would like to see politicians and public health 
     advocates focus discussions of the appropriate Federal 
     cigarette excise tax rate squarely on the issue of reducing 
     smoking. Both external costs and ignored internal costs 
     justify the adoption of government policies that interfere 
     with private decisions regarding the consumption of 
     cigarettes.
       Taxing cigarettes to reduce smoking by teenagers is a 
     rather blunt instrument because it imposes costs on other 
     smokers. But an excise tax hike is a very effective policy 
     with regard to teenagers because they are so sensitive to 
     price. The current Federal excise tax of 24 cents on a pack 
     of cigarettes is worth about half in real terms of the 8-cent 
     tax in effect in 1951. A substantial real tax hike to curb 
     youth smoking should move to the forefront of the antismoking 
     campaign.

                          ____________________