Up in Smoke: How Cigarette Taxes Affect Public Assistance Enrollment

Policymakers use tax penalties and incentives as a mechanism to modify the public’s behavior. Cigarette taxes are one of the most obvious examples of such a policy. As a matter of public health, society would be better off if fewer people smoked cigarettes—raising the cost of cigarettes with a tax offers the dual benefits of generating government revenue while altering consumer preferences away from consuming an unhealthy good. These dual benefits do not come without a cost. Cigarettes are an example of a good with inelastic demand; that is, a good for which the quantity demanded is not very sensitive to changes in price. In the case of products like cigarettes, for which the consumption cycle is difficult to break, policies that increase costs may ultimately result in greater dependence on government assistance from poorer households.

A recent paper by Kyle Rozema and Nicolas Ziebarth explores the relationship between changes in state cigarette tax levels and enrollment in public assistance programs. Specifically, Rozema and Ziebarth unpack the relationship between cigarette tax incidence and enrollment in the Supplemental Nutrition Assistance Program (SNAP) by comparing smoking and non-smoking households. Previously known as the Food Stamp Program, SNAP is a federal aid food-purchasing program for low- to no-income households. Qualifying SNAP households are required to demonstrate need through both an income and asset test. Once complete, SNAP beneficiaries are permitted to use their aid allowance at complying grocers, supermarkets and convenience stores.

Using panel survey data from the Current Population Survey (including the Tobacco Use Supplement) and data from the Consumer Expenditure Survey for 2001 to 2012, Rozema and Ziebarth build a regression model to isolate the effects of tax increases on SNAP enrollment.  For the purposes of this study, the authors chose to include in their analysis only those households that, after having enrolled in the SNAP program, remained receiving benefits for a minimum of 10 months.

In the discussion of their empirical results, Rozema and Ziebarth estimated the average pass-through rate of cigarette taxes—that is, the proportion of the cigarette tax that is reflected in the price to consumers—to be 80 percent. Furthermore, they observed that “a $1 increase in cigarette taxes increases quarterly cigarette expenditures by $30.” Rather than observe a significant scaling back of cigarette consumption, the authors found that low-income smoking households were more likely to enroll in food stamp programs in the months following a cigarette tax increase when compared to non-smoking households. For every dollar increased in cigarette taxes, eligible but unenrolled low-income smoking households were 3.1 to 3.3 percent more likely to enroll in SNAP than similar situated households with no smokers.

While an increase in SNAP enrollment is likely undesirable from a policy perspective, Rozema and Ziebarth do notice some positive public health effects of cigarette tax increases. Based on empirical evidence and survey results, a $1 increase in cigarette taxes yields, on average, a 0.5 percent increase in the likelihood that at least one smoker in a smoking household stops using cigarettes in the next year. (This observation, the authors note, does not preclude the possibility of consumers relapsing). Additionally, the authors estimate that a $1 increase in cigarette taxes reduces consumption by an average of 2.2 cigarettes a day per household, based on self-reported daily consumption figures provided by smoking households.

Rozema and Ziebarth’s study note some of the specific effects of cigarette taxation on low-income households, and how such tax policy may affect enrollment in public benefit programs. While these results are limited to the taxation and study of a specific good, the insights revealed through the study could have significant implications for tax policy at the state and federal level. The broader policy issues—namely, the consequences of aggressive tax policies on inelastic goods and how such policies affect the poor—are not probed extensively in the authors’ analysis, but should be a key consideration before changes in tax policy are implemented by public officials. In fact, the findings from their study only underscore the balancing act policymakers must master when using powerful tools such as tax policy to address public health matters.

Article source: Rozema, Kyle, and Nicolas R. Ziebarth. “Taxing Consumption and the Take-up of Public Assistance: The Case of Cigarette Taxes and Food Stamps.”, The Journal of Law and Economics 60:1. (2017): 1-27.

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