Addiction Policy and Taxes
One of the perennial questions in government policy is how to influence public behavior while still offering freedom of action. In other words, how can we get people to do the right thing without having to arrest them when they make a poor choice? One option is to use taxes as a way to change behavior. A classic example is taxes on cigarettes.
There’s a well-known pairing of cost and addictive behavior. As prices rise, use goes down. Along with this is the benefit of more taxes collected for the government entity – an attractive item for financially stressed state governments. At some point, the two figures balance out: less people smoke and that generates less revenue, balanced against higher taxes on a per-pack basis.
A press release from the journal Addiction describes a study to see how this works in practice. It showed that Georgia, if they raised their per-pack tax on cigarettes to a dollar would triple revenues while simultaneously drop consumption by 20 percent.
Georgia is a smoker’s paradise. With a current tax of only 37 cents a pack, they have the 3rd lowest price for cigarettes nationwide. The final price for a package of cigarettes, $4.37 pales in comparison to what that same pack costs in lost work and healthcare – a stunning $9.02. For every pack not smoked, the economy of Georgia saves $4.65.
These numbers, paired with a higher tax, led researchers to calculate an overall benefit from raising taxes as $1.37 billion – a substantial boon to Georgia’s budget.
Will it happen? The numbers are convincing, and the result a win/win, but taxes are not popular and cigarette smoking is. The study also looked at how much taxes a smoker would put up with, determining that there’s a bias toward the “left-most digit” in prices. That means the first number in the price of a pack of cigarettes has a much greater influence. Although only a few cents apart, consumers are much more likely to see a price of $4.95 as more “doable” than one of $5.01.
One of the study authors put it this way,
“The areas where we saw the biggest changes were those with left-digit transitions, or prices where the whole dollar price went up,” MacKillop said. Compared to the effect of a pack price increase from $5.60 to $5.80, the decrease in cigarette consumption from $5.80 to $6 was four times larger.
“People are disproportionately affected by those prices because we tend to think of numbers in whole terms,” he said. “This has important implications for policy makers because it suggests certain price changes will have a particularly large impact.”
The value of this study is that it gives legislators some real numbers to work with. Instead of just guessing what the impact of new tax policy will be, they can judge the merits of legislation based on a firm economic analysis.