The effects of cigarette excise taxes on health and wages

Abstract

The cigarette excise tax is viewed as an important policy tool to reduce smoking-related health problems and productivity losses. This is based on evidence that higher cigarette taxes reduce cigarette consumption and induce people to quit smoking, but there is also evidence that smokers adopt potentially health-reducing smoking behaviors to compensate for higher cigarette costs. In this paper, I exploit the substantial variation in cigarette taxes across and within U.S. states over time to examine the impact of cigarette taxes on health and wages. The analysis reveals that higher cigarette taxes cause a reduction in wages and a reduction in the number of healthy days in the past month. The negative impact on healthy days is more pronounced among individuals with low incomes and high daily intakes of nicotine and tar. These results indicate that cigarette taxes have unintended negative consequences, which may be driven in part by compensatory smoking behaviors. Alternative mechanisms related to weight gain and alcohol consumption are explored, but the analysis reveals that there is no empirical support for them.