An Economic Analysis of Measure 50

Jeff Alworth

Measure 50 gets its funding by taxing cigarettes.  There are a number of ways to assess whether this is good public policy or not, and one of the more objective is economic.  Fortunately, we have the analysis of Patrick Emerson, an econ prof from Oregon State University, to walk us through the issues on his new blog.  It's also timely--Nick's post from yesterday provoked many of the issues Patrick writes about. 

It's a detailed post, and the first section is on "externalities"--the costs and benefits born or enjoyed by a group as a result of another's activities.  This is central to the question of fairness, but hard to summarize.  You'll have to go read it yourself.  The second of three parts is more discrete, touching on the stability of a tobacco tax as a revenue stream. 

The next issue is how much revenue will be raised by an increase in taxes. Yes, the per-pack tax will rise, but the number of packs consumed will thus fall. Consumers will stop smoking or smoke less. They will switch to substitutes (nicotine gum?). They may start purchasing more cigarettes when on vacation or in duty-free shops. Whatever the cause, to estimate the reduction in sales of packs of cigs in Oregon, we need to know the price elasticity of demand for cigarettes. This is simply, in percentage terms, by how much the quantity of cigarette packs will fall, given a 1% rise in price. I looked the economics literature and, surprise, surprise, estimates vary widely. I would say that about -0.50 overall is about average (or even a bit overstated) and it is a bit higher for youngsters. So this means we should see about a 1% decline in cigarette consumption for a 2% raise in price. Since Oregon’s tax increase would raise prices roughly 20%, we should see a 10% drop in sales. So revenues should increase by roughly 10% (though equilibrium price should settle even higher) of which the states share has increased 71% so tax revenues could be expected to increase by about 61%. This looks like about an extra $162 million. So my extremely crude back-of-the-envelope calculations are pretty close to what I have seen is the state’s projections (though I am not sure why this is supposed to rise dramatically after the first biennium as they predict).

The post reads like one of James Surowieki's from the New Yorker--interesting analysis for the layperson.  Next up, he plans to discuss the economics of Measure 49.

Normally, I'd have tagged this as an "elsewhere."  The reason I haven't is because I have been a friend of Patrick's for 20 years and take great pleasure (if not credit) in seeing his new site.  I often blog about econ and then email to ask if I was right (my batting average is about like Ichiro's; not so hot for a blogger).  Now I can cut out the middle man and send you straight to the source. 

Now, go read his interesting post and discuss it there.

By Jeff Alworth Oct. 17, 2007