Vertical Equity Consequences of Very High Cigarette Tax Increases: If the Poor are the Ones Smoking, How Could Cigarette Tax Increases Be Progressive?

52 Pages Posted: 7 Dec 2004 Last revised: 26 Oct 2022

See all articles by Greg Colman

Greg Colman

Pace University - Department of Economics

Dahlia Remler

City University of New York - Baruch College - Marxe School of Public and International Affairs; National Bureau of Economic Research (NBER); CUNY The Graduate Center - Department of Economics

Date Written: November 2004

Abstract

Cigarette smoking is concentrated among low income groups. Consequently, cigarette taxes are considered regressive. However, if poorer individuals are much more price sensitive than richer individuals, then tax increases would reduce smoking much more among the poor and their cigarette tax expenditures as a share of income would rise by much less than for the rich. Warner (2000) said this phenomenon would make cigarette tax increases progressive. We test this empirically. Among low-, middle-, and high-income, we estimate total price elasticities of -0.37, -0.35, and -0.20, respectively. We find that cigarette tax increases are not close to progressive using both tax expenditure-based and traditional welfare measures. This finding is robust to cross-border purchasing, generic cigarettes, and substantial external effects. However, we find that taxes can be progressive under some behavioral economic models (Gruber & Koszegi, 2004) but that these may only apply to a small share of smokers.

Suggested Citation

Colman, Greg and Remler, Dahlia, Vertical Equity Consequences of Very High Cigarette Tax Increases: If the Poor are the Ones Smoking, How Could Cigarette Tax Increases Be Progressive? (November 2004). NBER Working Paper No. w10906, Available at SSRN: https://ssrn.com/abstract=618524

Greg Colman

Pace University - Department of Economics ( email )

One Pace Plaza
New York, NY 10038
United States

Dahlia Remler (Contact Author)

City University of New York - Baruch College - Marxe School of Public and International Affairs ( email )

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New York, NY 10010
United States

National Bureau of Economic Research (NBER) ( email )

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CUNY The Graduate Center - Department of Economics ( email )

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