Tax Increase On Cigarettes Will Aid State Economies, Despite Cutting Tobacco Sales, UB Study Finds

BUFFALO, N.Y. -- New York State's 55-cent-per-pack increase in sales tax on cigarettes that will take effect March 1 will have a positive, over-all effect on the state economy, despite reducing cigarette sales, a study by a University at Buffalo health economist has reported.

The new assessment, carried out by Eric Nauenberg, Ph.D., assistant professor of social and preventive medicine in the UB School of Medicine and Biomedical Sciences, employs a method called input-output analysis, that is designed to account for the interdependence of different industries and between business and consumers.

Nauenberg's findings, published as a special report in a recent issue of State Tax Notes, contradict those of the tobacco industry, which have claimed that increasing cigarette taxes has a negative impact on a state's economy.

"Those studies assume that resources used in the production and distribution of cigarettes would not be shifted elsewhere in the economy," Nauenberg states. "What actually occurs in most instances is that the vacuum created by declining tobacco sales is filled by demand for other goods and services. When these dynamics are included in studies, there is strong evidence that the overall economic impact of declining cigarette consumption is positive."

Nauenberg noted that this assessment is particularly applicable in non-tobacco-producing states, where half of the dollars spent on tobacco products go back to the states that grow and process tobacco. He referred to a Michigan study that showed a large portion of the dollars not spent on tobacco were used to purchase goods and services produced in-state, boosting its own economy.

He said he would expect the same to be true for New York and other non-tobacco-producing states.

The purpose of Nauenberg's research was two-fold: In addition to determining the economic impact of a cigarette-tax increase in New York State, he sought to validate a different method for making such an analysis, which would help states make their own assessments at significantly less cost than the current $40,000 standard methods. An input-output analysis costs less than $2,000, he said.

Nauenberg's study assumed a $1-per-pack increase. Using this figure, along with 1996 data from 528 different industries in the input-output analysis for New York State, the results predicted:

• A decrease in cigarette consumption of a low of 81 million packs to a high of 701 million packs per year.

• A $17 million to $148 million increase in the value of state industrial output over the next several years following implementation

• An increase of between 460 and 2,008 jobs.

Nauenberg said this input-output analysis confirmed the findings reported elsewhere using the standard costly method; that is, if any economic change occurs due to reduced tobacco consumption, it is likely to be positive.

An increase in state sales tax would not have a negative effect even in states where sovereign Indian nations can sell cigarettes at a much lower price because they don't charge state or federal tax, Nauenberg said.

"Those sales are bound to increase when the state tax goes up, but even though the state isn't collecting taxes on those sales, it isn't really a loss because that money comes back into the state economy through purchases of goods and services. The Indian reservations aren't self-sufficient. That money goes in and comes out again."

Nauenberg noted that decreased consumption of tobacco would reap additional long-term economic benefits for the state through less loss of life due to lung disease and other tobacco-related illness; fewer house fires caused by smoldering cigarettes, and a reduction in teen smoking, which would lower health costs for decades to come.

Jing Nie, a graduate student in the UB Department of Social and Preventive Medicine, also contributed to the study. The research was supported by a grant from the Robert Wood Johnson Foundation.