Objectives: This study examines the effectiveness of state and federal taxes in reducing the consumption of cigarettes, estimates the impact of government health warnings, and shows how warnings and taxes interact.
Methods: By means of a pooled time-series analysis from 1955 through 1994 with the 50 states as units of analysis, the impact of excise taxes on cigarette consumption for several different models and econometric techniques is assessed.
Results: From 1955 through 1994, increases in state taxes were effective in reducing cigarette use. Federal tax increases, however, appear to have been more effective. This difference is partly the result of the "bootlegging" of cigarettes across state lines and the size of the increases in the federal tax. Cigarette consumption also declined when health warning labels were added.
Conclusions: Increases of taxes on cigarettes are associated with declines in the consumption of tobacco. Because of inflation, increased health concerns, and the declining percentage of smokers, however, large reductions in consumption require large tax increases.