CBO on Cigarette Excise Taxes

CBO has a new report “Raising the Excise Tax on Cigarettes: Effects on Health and the Federal Budget.”

The study cites some of the work I have done with colleagues, namely our AJPH paper The Effect of Smoking Cessation for Longevity (2002) and The Price of Smoking (2004).

• capstone post (with links) for a 4 part series on the benefits of smoking cessation for longevity.
• capstone post (with links) for a 5 part series on the Cost of Smoking.

One thing to keep straight when asking “what will happen if we increase/decrease a tax” is having a clear counterfactual against which to assess any change (as compared to what?). It is easy to lose sight of what you are trying to accomplish when deciding upon the correct counterfactual with which to judge a potential policy. Further, there can be huge differences between a pure public health perspective (that tends to only look at benefits) and a fiscal one (that focuses on costs). An example of a one-side interpretation of the new CBO report can be found in this post titled “CBO Taxes Backfire“

Increasing the federal excise tax on cigarettes by 50 cents per pack would eventually increase Medicare and Social Security spending, because smokers would be healthier and live longer, according to a Congressional Budget Office report released Wednesday.

The report found that the tax increase would create short-term deficit reductions. However, by 2085, the costs associated with individuals living longer and consuming more Medicare and Social Security services would outweigh the health benefits and tax revenues, causing the deficit to increase slightly.

If all you are interested in is the fiscal impact on the federal budget only, then I guess that is fine. However, as important as the fiscal impacts of any policy are, they cannot answer every important policy question. We need to look at both the benefits and the costs of public policy when deciding what to do.

update: revised and expanded the initial post.

Tobacco Control Act of 2009

I participated in a very interesting day-long Economics of Tobacco Regulation round table hosted by the FDA and ASPE last week in Washington, D.C. The major goal of the session was to discuss findings, methods and data sets related to studying smoking initiation and cessation, in anticipation of increased regulatory steps that FDA can take as a result of the passage of the Tobacco Control Act of 2009. I will write a bit over the next few weeks about the Tobacco Control Act, a law that provides some new  regulatory powers to the FDA.

What sticks out in my mind from the session was the vivid illustration of the clash of public health versus economics in the analysis of smoking (assessing costs and benefits of regulations/interventions). My Ph.D. is in Health Policy and Management from UNC-Chapel Hill, and the answer in a School of Public Health to the question, “what is the optimal smoking prevalence?” is clear.

• The answer is a decided and emphatic ZERO.

When considering smoking from an economics perspective, the answer is more complex.

• It depends, mostly on how you measure the costs and the benefits of smoking (and how you discount them). However, there is almost certainly a non zero level of smoking at which the benefits of smoking outweigh the costs.

Both ‘sides’ in this discussion were very respectful and could engage in a methodological discussion of the reasons for the gap in the ideal smoking prevalence between the two premises.

• Consumer choice has to count for something, there are diversity of preferences, and humans have smoked for a long time
• Tobacco is an addictive product, people initiate when young and many smokers state regret at doing so late in life

The practical reason this gap must be bridged is that any major regulatory initiative brought under the auspices of the Tobacco Control Act of 2009 will have to have a detailed economic regulatory analysis completed, laying out the costs and benefits. Two key methodological questions were discussed:

• should the numerous benefits to smoking cessation (essentially avoided costs) be offset by a reduction in lost benefits from the same smoking (having the effect of reducing the net benefits of any regulation)?
• even more startling/interesting was the question of whether initiatives that prevent initiation should net out lost benefits from avoided smoking, again reducing the net benefits of any regulation?

My reaction/quick answer is yes to the first question and no to the second, but I am going to try and work my way into those answers more fully over a series of posts.

 

Cost effectiveness of smoking cessation

I was prepping over the weekend for a meeting Wednesday on the economics of tobacco control and ran across this very clear brief from the British Medical Journal that I thought was worth highlighting. Many of the health benefits of cessation accrue via life extensions, but they point out the morbidity differences by smoking status (measured by self rated health). Precise measurement of the morbidity benefits of cessation is likely important for continued cessation success (the chart below is cross sectional and doesn’t show changes). Communicating the benefits of cessation in different forms and formats maximizes the chance that change will be initiated.

More to the point, the article nicely lays out the cost effectiveness of simple smoking cessation interventions in terms of the cost of a life year saved as compared to common strategies to prevent heart attack.

The paper notes the following caution:

Care should be taken when extrapolating the results of these evaluations, as cost effectiveness estimates are likely to be time and country specific and highly dependent on the healthcare system in question. In a system of fee for service, as in the United States, monetary rewards may be necessary to encourage provision. On the other hand, if patients who stop smoking place a reduced burden on the primary care budget in future years, the incentives to provide such services may be inherent in the system.

While I don’t think I would describe the U.S. health care system (systems?!/non-system?!) as being simply fee for service, that helps to underline their point that precise estimates of the costs and benefits of smoking cessation are needed for each nation and likely sub-population to best target smoking cessation strategies. Smoking cessation is an old problem that remains a top public health priority. The CDC has declared tobacco to be a “winnable battle” and there is much work to do in this area.

II-Smoking Cessation: Selection Effects

This is the third in a series of posts looking more closely at the methods used to quantify the benefits of smoking cessation using this paper as an example; earlier posts:

• Dad can you stop smoking and not die? Sept. 13, 2011
• Smoking cessation: as compared to what? Sept. 19, 2011

A RCT of smoking cessation couldn’t and wouldn’t be done, so some sort of observational data must be used to quantify the benefits of smoking cessation. The choice of the Cancer Prevention Study II (CPS-II) presented benefits and costs:

• Biggest benefit: large number of person-years of follow up (7.2 million for females, 4.3 million for males)
• Biggest cost: selection effects that its use introduced

By selection, I mean the participants in CPS-II differed from the overall population:

• They were whiter (93% of CPS-II v. 80% 1990 Census) and they had higher levels of education (30% college degree in CPS-II v. 9% U.S. adults).

What does this mean for our estimates of the relative risk of death by smoking status? First, the direction of any bias due to selection is ambiguous, unlike measurement error in smoking status that provides a predictably conservative bias toward identifying no effect. Using racial differences as an example, two stories seem plausible. First, whites could receive more benefit from cessation because they have a longer background life expectancy than minorities. On the other hand, non whites could receive more benefit from cessation at later ages because of healthy survivor effects. I am unsure what direction the net effect that selection bias of this sort may go.

In the end, 11.5 million person years of follow up covers a multitude of sins, and we were able to control for race (white v. non white) and education in the estimation of the relative risk of mortality calculations that underlie our models. However, even though we had large enough cell counts to control for these variables, there is still worry that the underlying population is different from that used to obtain the relative risk estimates.

Other cohort studies available were even whiter and based on one geographic locale (Framingham), or were based on the experience of General Practitioners in the U.K. (British Doctor Study). It would be great to have a long term follow up database that was representative of the overall population in terms of race and education to update this study, particularly given the increase in the Hispanic population of the U.S. The Health and Retirement Study, which is approaching 20 years of follow up could be an option for updating, and the tradeoff would be smaller cell sizes vs. being more representative. Are there other databases that should be considered?

 

 

After Tobacco

Sarah Kliff has a post on a new book After Tobacco: What Would Happen if Americans Stopped Smoking (by Peter Bearman, Kathryn Neckerman and Leslie Wright; Coumbia Univ. Press, 2011). I haven’t read the book but will try and get to it soon. Kliff highlights a few of the outcomes in a post-Tobacco world that may seem counterintuitive to some:

The economic effect on public programs, however, would be more of a mixed bag. States’ Medicaid costs would noticeably decrease: lower-income populations have higher rates of smoking and the negative health outcomes that follow. But states would also lose revenue from cigarette excise taxes, which amounted to $13.75 billion in 2006. If Americans stopped smoking altogether, states could see a 1.4 percent decrease in revenue, according to a chapter from Hunter College’s Howard Chernick.

A similar, spilt-effect would be true for Social Security. With Americans living longer, Social Security would bear the increased cost of supporting people for a longer time. But those costs are slightly offset from an increase in healthy workers, who “tend to earn more and retire later,” leading to higher contributions. On balance, “After Tobacco” estimates the end of smoking means a slight, 1.58 percent increase in Social Security outlays.

We found similar cross subsidies in The Price of Smoking that I have blogged about. I will be most interested in the methods they used and hope to blog about them in the next few weeks.

 

The Cost of Smoking-V

In June I did a four part series on the cost of smoking that showed that the social cost of cigarettes was $40 per pack ($2000):

• $33/pack in private costs borne by the smoker mostly through shortened life span
• $5.50/pack in quasi-external costs borne by the household (spouse and children) primarily via increased morbidity and mortality
• $1.50/pack in pure external costs that represent the net effect of smoking on things like Medicare, Medicaid and Social Security

Yesterday I posted on the substantial life extension benefits that accrue from smoking cessation even as late as age 65. I am going to write more about the methods used in that study, but first wanted to revisit the cost series briefly to amplify on a type of cost that we didn’t include in our estimates of the cost of smoking.

Working on the book The Price of Smoking was great fun, because we had a large project team that discussed and debated many issues. One that was particularly contentious was whether to include intangible costs such as the cost of my son not knowing one of his grandfather’s and the anguish that this fact causes my wife. We decided to not include such intangible costs in order to stick with conservative estimates as well as difficulty in assigning a cost. We did of course provide a dollar estimate of the cost of shortened life span, the primary cost of smoking. This paper by Viscusi and Hersh estimated the private mortality cost (assumed to be borne by the smoker) of $222/pack for men and $96/pack for women (in 2006$). Cutler (2002) $22/pack and Gruber and Koszegi (2001) $30/pack had private mortality costs per pack that were more similar to our estimate ($33/pack in 2000 dollars).

Attaching a dollar value to a statistical life is plenty controversial, but accepted, and there are different methods and approaches that can be compared. In the end, intangible costs such as a child not knowing his grandfather are real, but we thought it better to not provide a dollar value for them and leave that up to the reader, in part because of how many sources of intangible costs we could identify as a project team. If you start including such costs, where do you stop? In any event, our estimate of the social cost of smoking at $40/pack in 2000 dollars is a lower bound estimate and there are harms not accounted for in this figure.

*********

Papers/Works Cited

Frank A. Sloan, Jan Ostermann, Gabriel Picone, Christopher Conover, Donald H. Taylor, Jr. The Price of Smoking. MIT Press, 2004.

W. Kip Viscusi, Joni Hersch. The mortality cost to smokers. Journal of Health Econmomics 2008;27:943-58.

Cutler, D.M., 2002. Health care and the public sector. In: Auerbach, A.J., Feldstein, M. (Eds.), Handbook of Public Economics. Elsevier Science,
North Holland, pp. 2145–2243.

Gruber, J., Koszegi, B., 2001. Is addiction rational? Theory and evidence. Quarterly Journal of Economics 116 (4), 1261–1303.

The cost of smoking-IV (external costs)

This is the fourth and final post on the social cost of smoking, which is estimated to be $40/pack. Prior posts have focused on the private cost ($33/pack), or those costs borne by smokers themselves, and the quasi-external costs ($5.50/pack), or those costs that were imposed upon the family of smokers. This post focuses on external costs, or those imposed on society by smoking. They are relatively small, around $1.50/pack, but may be the most important component of the social cost of smoking from a public policy perspective, because they represent a private action imposing costs on society.

Our cost estimation method compared the costs experienced by 24 year old smokers in 2000 with non smokers, and calculated life cycle estimates of cost that accounted for smoking cessation as well as differential morbidity and mortality that were related to smoking. To do this we identified the magnitude of specific external costs and then subtracted the excise taxes paid by smokers to arrive at the net external cost. We projected that the average excise taxes paid by 24 year old smokers in the year 2000 over the course of their smoking career would be $0.36/pack in federal taxes and $0.40/pack in state taxes. Our estimates were based on national averages in 2000 and were not done in a state-specific manner. In sum, our results show that while smokers could be expected to pay around $0.76/pack in excise taxes, the costs their smoking imposes on society is higher. This yields our net external cost estimate of around $1.50/pack.

Major sources of external cost include life insurance outlays of $1.78/pack. This figure means that smokers (who do pay higher life insurance premiums) do not pay premiums that are high enough to account for their observed mortality as compared to non smokers who purchase private life insurance. This is an example of private decisions on the part of smokers and non smokers in life insurance markets that have the effect of non smokers cross subsidizing smokers. The magnitude of the effect is larger than the net external costs of smoking. Other external costs include foregone tax receipts on lost Social Security taxable earnings ($1.02/pack), work loss due to sick leave, ($0.76/pack), and small productivity losses while smokers do work ($0.24/pack), again as compared to non smokers.

Across the entire smoking career, smokers impose around $0.49/pack in external medical care costs that are not borne by the smoker. However, the impact differs substantially by the type of payer. Private insurers bear the majority of the brunt, with Medicaid experiencing smaller increased costs due to smoking. However, smokers have lower Medicare costs relative to non smokers when using our life cycle cost estimation approach. The increased cost of smoking to private insurance, and smaller increases to Medicaid due to smoking are  simply larger than the reduction in lifetime Medicare benefits that smokers receive.

Smokers also cross subsidize non smokers in both public and private retirement plans (pay in more than they take out compared to non smokers). Social Security outlays are $0.82/pack lower for smokers, due to the greatly shortened life span that they experience (net of increased Social Security disability payments). Smokers similarly cross subsidize non smokers in private pension plans to the tune of $1.24/pack.

The present value of the external costs imposed on society by a 24 year old smoker in 2000 was $6,201 ($3,829 for female smokers and $8,001 for male smokers). The total national external cost estimate for the cohort of 24 year old smokers in 2000 was around $7.5 Billion. As with the other types of costs, this is an incidence estimate, so each successive cohort of 24 year old smokers would impose external costs of similar magnitude upon society.

When assessing external costs, a key public policy question is ‘are cigarette taxes too low, or too high?’ When we wrote this book (analyses were completed in 2002), the external costs of smoking were around $1.50/pack, which leads to a public policy conclusion that excise taxes were too low and should be raised. Since then, such taxes (federal and state) have risen dramatically. The weighted average excise taxes paid per pack we used to identify the net external cost was $0.76/pack; a recent RWJF study provides a national average excise tax of $2.13/pack at the end of 2009 (2009 saw a sharp increase in the federal tax to $1.01/pack; state taxes have gradually risen and the national weighted average in 2009 was $1.12/pack). While there is little reason to believe there have been large changes in the private and quasi-external cost of smoking since we finished the book, there is good reason to believe that the aggregate level of tobacco excise taxes collected now are now very close to the pure external costs imposed by smoking. It is important to remember that the tax estimate we used in 2002 as well as the one provided by the RWJF study, represent average state excise taxes, when in fact actual tax rates differ dramatically by state; these state-level cross subsidies were not accounted for in our study. Further,even some localities have imposed large excise taxes, such as New York City which now has a $1.50 tax, and Cook County, Il. that has a $3.00/pack excise tax (all of these are in addition to state and federal taxes).

Several points to highlight:

• It is likely that cigarette taxes are near the external cost level at current rates of taxation. If the goal is for tobacco taxes to simply account for the purely external costs of smoking, then that policy goal has roughly been achieved. However, we have identified a substantial quasi-external cost burden of smoking ($5.50/pack) which is far above the current average excise tax rates in the U.S. If these costs are indeed viewed as external, then excise taxes remain far too low.
• There are other public policy reasons to further increase tobacco taxes, namely seeking to reduce smoking and simply to raise revenue. Increases in the price of cigarettes (see p. 11, Fig. 2 of the RWJF report) are linked with both reduced uptake of smoking as well as with increased cessation. Further tax increases could be justified as a smoking cessation policy as well as a smoking prevention policy. The view of smoking as purely private action is argued against because of both the addictive nature of the product as well as harm that is imposed upon children who cannot choose. Gruber and Koszegi, (2001) and Gruber and Mullainathan (2002) argue that excise taxes are a ‘smoker self control device’ designed to lessen individual harm, primarily in the form of shortened lifespan. If this view is taken, then excise taxes are far too low given how high the private costs of smoking are found to be. So, excise taxes are likely to continue to increase. Whatever the motivation for setting tax rates at a given level, a key policy issue will remain the degree to which these monies are used for cessation and prevention as opposed to being used by states to simply raise revenue for general purposes.
• Smokers cross subsidize Social Security, as well as Medicare, meaning smokers receive less in benefits paid out, even after accounting for the fact that they pay in slightly less as compared to non smokers. If you play the thought experiment ‘what if no one smoked’ then one answer is that the financing problems of Social Security and Medicare would be worse than they are today. The primary reason is the large impact of smoking on mortality. In the smoking life table that underlies this project, of 100,000 24 year old male smokers, only 74,618 would be expected to survive to age 65 if their cessation rates followed population averages for four decades. The number of 24 year old never smokers expected to survive to age 65 out of 100,000 is 87,480. Thus, around 13% more 24 year old smokers than 24 year old never smokers will pay into Social Security and Medicare, albeit at slightly reduced rates, but die before they reach the age of typical eligibility for benefits.
• The magnitude of this effect is larger for Social Security than it is for Medicare because of the differences in benefits in the two programs. Social Security provides cash that is indexed to inflation, while Medicare pays for health care whose costs are rising must faster than inflation. To give a sense of the magnitude, male smokers receive $5,264 less than non smokers from Social Security, and $2,763 less in lifetime Medicare benefits than non smokers. In Social Security, smokers just get benefits for a shorter period, on average. In Medicare, they get benefits for a shorter period, but are more expensive than average while doing so. The accounting cross subsidies pointed out are facts that we have identified using a life cycle cost estimation strategy; they do not imply that reducing mortality from smoking is not a public policy priority. If you analyzed Medicare beneficiaries at a point in time you would find their costs were higher than non smokers and could conclude that smoking increases costs, which they certainly do in a cross sectional, or prevalence perspective. It is just that such an approach masks the profound mortality burden that smoking exhibits on cohorts of persons before they even attain Medicare eligibility. How important seeking to end the huge private cost that is imposed by smoking on smokers through a shortened life is a value judgment.
• Smoking increases overall health care costs in spite of reducing Medicare outlays; private insurers bear the brunt of these increased costs. For male smokers, private insurers experience over $5,000 in increased costs, while Medicaid has costs increased by around $300. For women the corresponding figures are $3,000 and $1,300. There are a variety of states considering policies to either increase premiums or cost share amounts for smokers covered by Medicaid or State Employee insurance programs. Our estimates show that private insurance companies could be seen as justified in adding such surcharges. A key question is whether such charges are simply designed to require smokers to self finance their extra costs while covered by private insurance, or if the goal is to finance expanded cessation programs? The former would be adopting a prevalence perspective on smoking, but for private insurers who may cover someone this year but not next, that is the perspective that makes business sense. For Medicaid, the smoking cost differentials are smaller, and it is more difficult to interpret what they mean since Medicaid provides both acute care coverage in addition to being the primary payer of nursing home care services for the elderly. Again, the key question for states considering Medicaid smoking surcharges is what is the goal of the policy?

Over the summer I will be writing some follow up posts to this series that focus on different aspects of the smoking issue, and which discuss broader applications of the life cycle cost estimation strategy approach that we used. Look for around one/week.

Full citation: Frank A. Sloan, Jan Ostermann, Gabriel Picone, Christopher Conover and Donald H. Taylor, Jr. The Price of Smoking. MIT Press: 2004. The Price of Smoking is available as an ebook.

J. Gruber and B. Koszegi (2001). Is Addiction Rational? Theory and Evidence. Quarterly Journal of Economics 116:1261-1303.

J. Gruber and S. Mullainathan (2002). Do Cigarette Taxes Make Smokers Happier? Cambridge, MA: NBER working paper #8872.

The cost of smoking-III (quasi-external cost)

This is the third post in a series on the social cost of smoking, estimated to be $40 per pack (2000$). Read the series introduction, and the second post focusing on the private costs of smoking (costs borne by smokers themselves, $33 of the total $40/pack social cost). The cost of smoking was estimated using a life cycle approach that compares the experience of 24 year old smokers in 2000 to that of non smokers, while accounting for the impact of smoking cessation. The posts are based on a book I wrote with Frank Sloan and others (The Price of Smoking, MIT Press, 2004).

Today’s post focuses on the quasi-external cost of smoking–those costs imposed by smoking on the spouse and children of smokers–which are estimated to be around $5.50/pack, much smaller than the private costs ($33/pack), but larger than purely external ones ($1.50/pack). Typically the sum of private costs (borne by smokers) and external costs (borne by others) is the social cost. We distinguished external costs borne by members of a smokers’ household from others to help illuminate potential policy options to address such costs, as well as for conceptual reasons discussed below.

By far the largest quasi-external cost is increased spouse mortality ($5.20/pack), which reflects the earlier mortality that spouses of smokers experience (years of life lost were valued at the same $100,000 per life year lost figure used for estimating private mortality costs). There is a small cost of $0.14/pack for the elevated rate of infant death experienced by the children of smokers (life years lost valued at $100,000 each). Similarly small costs were identified for spousal disability ($0.25/pack) and increased out of pocket medical expenditures for household members ($0.14/pack). The quasi-external costs of smoking were reduced by higher receipt of Social Security survivor benefits ($0.17/pack) as well as slightly higher receipt of private pension payments ($0.12/pack); both of these bars dip slightly below the origin in the figure below, showing that spouses of smokers are cross-subsidized by others due to the impact of smoking.

All told, the present value of the quasi-external cost of smoking was $23,407 ($15,985 per female smoker, $29,037 per male smoker), with a total national cost estimate of around $28 Billion dollars for 24 year old smokers in 2000 (table 11.2, p. 254 of the book has more detail). As with private costs, this is an incidence estimate, so each successive cohort of smokers would impose quasi-external costs of this magnitude on their household over the course of their smoking career.

Around 16% of married couples had one current smoker coupled with a never smoker spouse; these are the types of couples in which quasi-external costs were imposed.  The table below (p. 234) shows the smoking status identified in wave 1 of the Health and Retirement Survey (HRS),the baseline of a study used prominently in our estimations, to provide a sense of the degree of discordant smoking status among near-elderly married couples at a point in time.

As a rule, economists typically count costs that are borne by family members as internal costs. In doing so, the preferences of all members of the household are assumed to be represented in the decision to smoke. The argument is that even if a particular family member bears a given cost, because of bargaining, costs and benefits are distributed within households in ways that make sense to the family and serve to keep them together. A non smoking spouse who worries about health effects or who doesn’t like the smell of smoke could bargain with the smoking spouse to obtain other concessions. Perhaps the wife smokes and the husband gets to play an extra round of golf per week. Or the smoking spouse agrees to drive soccer car pool.* However, such a bargaining model makes no sense where there are children involved, and we have identified a mortality impact of smoking on the children of smokers. And with marriage dissolution rates of over 50%, the bargains made at a given point in time may not be seen through. With private costs, the calculus of what the benefit magnitudes would have to be to make smoking ‘worth it’ is far more straightforward to think through than is the case with costs imposed on family members. These distinctions lead us to separate quasi-external from the external costs of smoking. However, if you really disagree with this conceptual distinction, you can simply add private and quasi-external costs together.

Several points worth considering:

• The primary quasi-external cost is shortened life of the non-smoking spouse that is due to their spouse smoking. This cost ($5.20/pack) plus the greatly shortened life span experienced by smokers ($20.28/pack, see post 2 on private costs) shows that a majority of the social cost is borne by adults who could be understood to be making informed choices (to smoke and to be married to a smoker). Some will view this as evidence of the need to expand cessation efforts due to the sheer magnitude of harm being imposed because of smoking, while others may view these costs to not be a matter of public policy. This is a value judgment. In economic terms, the first group cannot imagine benefits worth this magnitude of lost life, while the second assumes they must be of sufficient size to justify smoking and even if they are not, it is only a private mistake.
• The cost of shortened life to children living with a smoker while relatively small ($0.14/pack), helps to underline why many reject the idea that the smoking decision is a purely private one. Even if smokers themselves bear more cost, a side effect is to impose cost on others who cannot choose. While infant deaths are rare, and those attributable to smoking are only a subset of a rare event, our life table estimates identified 599 male infant deaths and 409 females deaths due to smoking, which we valued at $100,000 per life year lost discounted at 3% for a total cost of $3.036 Billion (table 11.2, p. 254).
• Couples with discordant smoking status may be good ones to target with smoking cessation efforts. While 16% of couples had one current and one never smoking spouse (12.1% male smoker; 4.3% female), around 6 in 10 persons who were married were former smokers, so it is possible to quit (the sample in question contained persons in their 50s and 60s). The family is likely a key unit in which to target cessation efforts. Various states considering increases in cost share and/or premiums for Medicaid beneficiaries or state employees who smoke should consider targeting cessation resources to families. Particularly families with a smoking spouse and a non-smoking one may be ripe for smoking cessation interventions. The key question for such proposals is what is the goal of the policy?

Tomorrow we will look at purely external costs that smokers impose on society, and we will delve into the cross subsidies of various programs beneath the top level impacts. There aren’t as many value judgments when addressing those costs, as they are clearly a matter of public policy.

Full citation: Frank A. Sloan, Jan Ostermann, Gabriel Picone, Christopher Conover and Donald H. Taylor, Jr. The Price of Smoking. MIT Press: 2004. The Price of Smoking is available as an ebook.

*If this seems a trivial concession, you have never tried to drive from Durham, N.C. to Cary, N.C. for a 5:30pm soccer practice.

update: cleaned up typos

The cost of smoking-II (private cost)

Yesterday’s post provided an overview of the cost of smoking, and estimated that the social cost of smoking is around $40 per pack (in 2000 dollars). The graph below shows the relative magnitude of private, quasi-external (family), and external costs, which together equal the social cost. All costs are displayed in dollars per pack of cigarettes smoked, but the book (The Price of Smoking, MIT Press, 2004) I wrote with colleagues provides detailed estimates by gender and cost category, as well as national aggregate cost estimates.

This post focuses on the private cost of smoking which we estimate to be around $33 dollars per pack, or approximately 80% of the social cost. Private costs–those costs due to smoking that are borne by smokers themselves–are by far the largest component of the social cost of smoking. We estimated costs using a life cycle approach that compared costs for 24 year old smokers to those of non smokers and attributed the differences to smoking (with some adjustments). Our method accounted for smoking cessation patterns and their influence on the social cost of smoking. All of the relationships estimated were based on large amounts of (mostly) longitudinal data. The methods will be described in a later methodological post.

By far the largest component of the private cost of smoking is mortality cost ($20.28/pack). This is our estimate of the value of life lost due to smoking, which can be viewed as a willingness to pay estimate. We used a conservative estimate of $100,000/life year lost, even though many life saving interventions that cost more than $100,000 per life year saved are in widespread use. The next largest component of private costs is lost wages due to smoking ($5.10/pack), estimated by lost Social Security-taxable earnings, which is likely an underestimate since it understates lost income for persons with wages above the Social Security payroll tax maximum. Note that this is not double counting; the mortality/willingness to pay estimate represents the consumption value of a lost life year in economic terms, which is viewed as independent of wages. In non-economic language, it could be viewed as the inherent value of being alive, which is again separate from income. Note that the lost Social Security wages per pack estimate is weighted by gender which obscures extreme gender differences in lost wages due to smoking ($38,566 for males, $631 for females). This is due to both mortality and wage differences by gender that are related to smoking.

We estimated the cost of disability due to smoking at $3.44/pack, and increases in out of pocket medical costs were relatively small at $0.24/pack. Smokers receive less in both private pensions ($1.36/pack) as well as in Social Security outlays ($1.01/pack). A curious finding of our work is that non-smokers cross subsidize smokers in private life insurance markets. While smokers pay higher premiums, they do not pay increased premiums sufficient to account for their excess mortality compared to non smokers, so we credited smokers with a $1.78/pack subsidy that is shown in the chart below by the only bar that sticks down instead of up.

The cost of cigarettes was estimated at $3.12/pack* in 2000 dollars, likely an understatement of the true cost since in our estimates the real price of cigarettes did not rise over time.  However, they have risen since we did this work and may continue to do so. There were some private costs that were identified in past literature that we excluded due to having limited data, such as extra costs of dry cleaning and house cleaning for smokers that have been estimated to be in the range of $300-500 per year.

The figure below shows the distribution of the private cost of smoking.

The present value of the private cost of smoking to a 24 year old smoker in 2000 was $141,181 ($182,860 for men, and $86,236 for women) per smoker. The national or aggregate cost that each cohort of 24 year old smokers impose upon themselves over the course of their life is estimated to be $168 Billion (all in 2000 dollars). This is a large number, but it is important to remember that these costs are spread across 5 or 6 decades for some of these smokers. Several points bear highlighting:

• Some would say private costs resulting from private decisions require no public policy response, so long as excise taxes are set at an appropriate amount to cover external costs. The large amount of smoking cessation and regulation efforts undertaken show that is not the predominant perspective held in society. There are many policy efforts undertaken to prevent smoking and encourage cessation.
• Our estimates of the private cost of smoking suggest that individuals must receive at least $141,181 worth of benefit from smoking over the course of their life (from age 24 until death or they stop smoking) if smoking is a rational decision. We have not attempted to measure the benefits of smoking, but if one were assuming forward looking consumers, who have perfect information on costs and benefits, and who have stable preferences, the benefits of smoking would have to be very large. An alternative explanation is that smokers are irrational. Of course the addictive nature of cigarettes complicates this analysis and there is ample reason to believe costs and benefits are not well understood at young ages when most people start. These issues help explain why most reject that smoking is a pure private activity, even if tax rates could cover the external costs.
• Smoking is an activity that has become taboo, and in some circles is viewed as truly irrational, or even unimaginable. Yet some persons continue to smoke. It is worth remembering that there are many activities that are commonly engaged in that are viewed as unwise by some. Just to give an example, detailed sub-calculations in our book (see box 11.1 on p.248) show that an average smoker smoking 400 packs per year gives up around 800 hours of future life expectancy by doing so. By comparison, between one-sixth and one-third of adults watch at least 2 hours of television per day. Leaving aside multi-tasking, and making the assumption that watching television is non-productive, this time could be understood as ‘lost’ in much the same way life span is lost to smoking. Television watchers may say they enjoy watching TV, but so to will smokers likely say they enjoy smoking. The point is, any activity that consumes around 2 hours per day in a manner that is judged to be ‘wasted’ or ‘lost’ could be estimated to have a private cost similar to that of smoking. A mix of market incentives (higher taxes, others) and detailed understanding of the psychology of smoking are likely needed to further reduce smoking incidence and prevalence.
• The extra medical cost borne by smokers is relatively small ($0.24/pack) compared to other private costs. There are currently a variety of policy initiatives related to further increasing either the out of pocket cost for medical care for smokers, or the premiums they pay. Whether this is a good idea turns out to be a complicated question, because it depends upon the goal of the policy. You also must move out of the realm of purely private costs of smoking and begin to look at the external costs.

Tomorrow’s post will start to do this by focusing on the quasi-external costs of smoking that are imposed upon the families of smokers.

Full citation: Frank A. Sloan, Jan Ostermann, Gabriel Picone, Christopher Conover and Donald H. Taylor, Jr. The Price of Smoking. MIT Press: 2004. The Price of Smoking is available as an ebook.

*We estimated the price of a pack of cigarettes as follows. We took lifetime cigarette excise tax payments based on age-specific consumption from the 1998 National Health Interview Survey (NHIS), discounted by 3% per year, multiplied by the probability of survival to each year for a typical 24 year old smoker, and multiplied this estimate by the average price-to-tax ratio in the year 2000.

update: cleaned up a few places

The cost of smoking

I talked with a reporter last week who asked me a simple question:

• do smokers actually save society money because they die sooner?

The short answer is no, smoking imposes large costs on society. However, as I talked with the reporter, I realized that he had many questions underneath this simple one, that not only related to aggregate or net costs (social cost), but to the distribution of costs (who bears the burden).

I am going to do a series of posts looking at the cost of smoking to society, based on a book that I wrote with Frank Sloan and others (The Price of Smoking, MIT Press, 2004). Our book provides a comprehensive life cycle estimate of the social cost of smoking. This was done by taking the present value of the life cycle stream of private, external, and quasi-external costs for a 24 year old smoker (all costs shown in 2000 dollars). Using many sources of data, we created smoking life tables, and also provide a detailed accounting not only of net costs, but of various cross subsidies that exist. The NPV social cost of a 24 year old smoker was around $220,000 for men, and $106,000 for women. Our calculations account for the purchase cost of cigarettes as well as excise taxes paid. The bottom line of $171,000 shown below is a mean social cost of smoking for a 24 year old smoker, weighted by gender (table 11.4 of the book (p. 257):

We further estimated that the social cost of smoking in 2000 was around $40/pack of cigarettes, distributed as follows:

• $33 private cost: borne by the individual, primarily through a substantially shortened lifespan
• $5.50 quasi-external cost: borne by the smokers’ family through increased health costs, slightly lower wages and other factors
• $1.50 external cost: borne by society, and representing the net effect of things like taxes paid, Medicaid and Medicare payments, and Social Security received

Our estimates show that smoking imposes very large social costs. It is true that a large proportion of the costs are borne by the smoker themselves (what we called private costs), which could lead someone to think that this is mostly a private decision and not a matter of public policy. However, there are other costs, some borne by a smoker’s family (we called them quasi-external costs), including children, and others borne by society as a whole (external cost). And the relatively small magnitude of external costs as compared to private ones obscures the sheer size of the external costs of smoking. Our estimates imply a total external cost of a cohort of 24 year old smokers at $35 Billion over their lifetime ($7 Billion for external, plus $28 Billion for quasi-external). Note that this is an incidence cost, so for each cohort (the next year of smokers and so on) there is another $35 Billion in external costs imposed by smoking.

For the remainder of the series, I am going to delve more deeply into what we measured (and didn’t measure) to estimate private costs, quasi-external costs, and external costs. I will also identify cross-subsidies of one program versus another that may be of more interest to some than even the net, or the social cost. Finally, I will describe how our book can and cannot be used to answer direct policy questions like ‘should a given state charge smokers a higher cost share in Medicaid?’ Or, ‘should cigarette excise taxes be raised?’

Other Posts in this series addressed the components of the social cost of smoking:

• Private costs, June 8, 2011
• Quasi-external costs, June 9, 2011
• External costs, June 10, 2011
• What was excluded, September 14, 2011

Full citation: Frank A. Sloan, Jan Ostermann, Gabriel Picone, Christopher Conover and Donald H. Taylor, Jr. The Price of Smoking. MIT Press: 2004. The Price of Smoking is available as an ebook.