How Dueling Economists Add Up Tobacco Bill

As Senate resumes debate this week, both sides pull out scholars and studies to buttress their positions.

A tax hike is a tax hike is a tax hike.

That's what some conservative critics are saying of the landmark tobacco legislation that the Senate resumed debating June 1. The measure, which would overhaul how US cigarettemakers sell their wares, raises a staggering $516 billion over 25 years via a $1.10-a-pack hike in the tax on tobacco.

The political discourse is growing more heated as the vote nears, with critics of the tax using words like "greed" to describe the motives of tax-hike proponents.

The political dimension has widened. Now lawmakers on both sides are using a cadre of calculator-toting number-crunchers - also known as economists - to aid them in their arguments.

Among the fundamental issues for the dueling economists: Do higher taxes discourage people - especially teenagers - from smoking? Will the tax hike be borne primarily by the poor? Will the bill, if it passes, boost cigarette smuggling?

Teen smoking

Numerous studies find that a basic law of economics - that a higher price for a product reduces demand for that product - applies to tobacco, notwithstanding the addictive nature of cigarettes. A 10 percent price hike will shrink cigarette sales by about 4 percent, 40 or so studies find.

But less research exists on price and youth smoking. Sen. John McCain (R) of Arizona, sponsor of the bill, asserts it will stop "3,000 kids a day from starting this life-threatening addiction."

But will a youngster buy a music CD rather than a more expensive pack of cigarettes? Or will group dynamics and advertising prompt a teenager to buy cigarettes regardless of cost?

Studies by some economists find that youths are even more responsive to price than adults are. A 10 percent hike in tobacco prices prompts a 7 percent drop in youth smoking, they say.

Because 9 of 10 smokers pick up the habit as teenagers, "substantial sustained cigarette tax increases are potentially the most effective means of achieving long-run reductions in smoking in all segments of the population," says Frank Chaloupka, a University of Illinois, Chicago, youth-smoking expert.

If the McCain bill passes, Mr. Chaloupka calculates that the number of youths under 18 who smoke would be cut by a third - from 16.6 million to 11 million. Overall smoking would in short order drop about 20 percent, as youths didn't start and adults cut back or quit.

But a recent paper by Cornell University economist Donald Kenkel and two colleagues "set off a fire," as he puts it, by raising "serious doubts" that tax or price increases can substantially reduce teenage smoking. It found that a nonsmoking eighth-grader was just as likely to be a smoker by 12th grade in states where cigarette taxes went up as in states where they didn't.

While the Kenkel paper was quickly trounced by other economists (who say the Cornell group misinterpreted their own findings), Mr. Kenkel says: "I do not view these criticisms as the last word." He's preparing a response.

Regressive tax?

A report by the Tax Foundation in Washington says the bill would raise cigarette taxes $356 next year and $602 by 2003 for the average single-smoker household. Of the $94.5 billion the nation's smokers would pay over five years, one-third would come from those who earn less than $15,000 a year, figures Patrick Fleenor, an economist at the tax research body.

Mr. Chaloupka counters by citing his own and other studies showing that less-educated smokers, those who probably have low incomes, are more likely to reduce or stop smoking than are the well-off when cigarette prices rise substantially. The case is the same for African-American youths, he says. Nonsmokers, of course, won't pay anything.

The smuggling issue

A Treasury official notes that even after the tax hikes, Canadian cigarettes will still be more expensive than American-made brands. Most American smokers don't like the taste of Mexican cigarettes, and the US-Mexico border is already intensively policed, he notes.

Further, US cigarettemakers will be required to label tax-free packs for export with an export-only label and to keep detailed records on their distribution. There would also be heavy new penalties for smuggling tobacco.

Cigarettemakers, for their part, have launched a $50 million ad campaign that claims the higher tax would create a huge black market for smuggled cigarettes.

The ads also say the average smoker would pay more in cigarette taxes than in income taxes.

If a bill passes the Senate, the House is then expected to tackle the issue. Whether legislation will actually emerge from Congress remains uncertain.