Can Cigarette Taxes Still Reduce Teen Smoking?

Charles Courtemanche
University of Kentucky

Bo Feng

Arjun Teotia

Abstract: Several prior studies have documented that a higher cigarette tax reduces youth smoking, but Hansen, Sabia, and Rees (2017) found that this effect disappeared in recent years.  We argue that this disappearance can be attributed to nonlinearities in the relationship.  Continually rising tax rates over the past several decades have induced price-sensitive youth to quit smoking, leaving only those who are price-insensitive in the market, making further tax hikes less effective deterrents.  Using data from the national and state Youth Risk Behavior Surveys, we present two pieces of evidence to support this hypothesis.  First, using a semi-parametric model, controlling for state and year fixed effects as well as observable characteristics, we document a diminishing marginal impact of cigarette tax rate on youth smoking, with recent tax hikes in most states falling on the flat portion of the curve.  Second, focusing on states where the baseline tax rates are low, we find that tax increases still reduce youth smoking even in the period during which Hansen, Sabia, and Rees find no effects on average.  Both results are robust to allowing for state-specific linear time trends, which contrasts the sensitivity observed in prior work.

Released: November, 2020