Econ 101: When the price of e-cigarettes goes up, people smoke more

It should be common sense, especially to our policymakers, that raising the price of one product or banning it induces consumers to shift to a cheaper alternative. Unfortunately, it isn’t. And that has resulted in some especially concerning results when it comes to tobacco policy.

Virtually every American knows by now the dangers of cigarette smoking. As a state and as a country, we have come so far since the 1960s when the Surgeon General’s report about the harms of cigarette smoking was first released.

In our report published in 2021, for example, we noted that while 23.3 percent of US adults smoked in 1999, in 2018 the figure was down nearly 10 percentage points to 13.9 percent. Similarly in Minnesota, 22.1 percent of adults smoked in 1999. But in 2018, that number was down to 13.8 percent.

Smoking among young people has had an especially dramatic decline in Minnesota. As we noted,

Current cigarette use declined by 90.1 percent among high school students and 78.0
percent for middle school students between 2000 and 2020.

Regrettably, the historic progress we have made in reducing smoking is under threat both in Minnesota and the rest of the country. And that is due to one main reason: our lawmakers do not care to understand basic economics, more specifically, the idea that raising the price of one tobacco product incentivizes tobacco users to switch to a cheaper alternative.

Under the intent of eradicating what they deem as “a vaping pandemic among the youth”, policymakers have banned e-cigarettes or raised e-cigarette taxes, despite research showing that e-cigarettes are significantly safer compared to combustible cigarettes, effectively pushing more and more people to smoke cigarettes.

E-cigarettes as a substitute for traditional cigarettes

We see the cycle repeat itself with no end in all sorts of places around the country. First, lawmakers in a state or locality get concerned about the “vaping pandemic among the youth.” So, in order to tackle the pandemic, they either ban e-cigarettes and related products or tax them heavily. Next thing we know, people stop using e-cigarettes and instead switch to traditional cigarettes.

We saw this first hand in Minnesota after our state imposed a tax on e-cigarettes. A study released in 2019 estimated that about 34,000 smokers were deterred from quitting smoking cigarettes after the price of e-cigarettes went up due to the tax. Another study conducted in San Francisco found that smoking rates among the youth doubled after the city banned e-cigarettes.

In another study published even more recently in the Journal for Health Economics, the results are largely the same. In this study, researchers looked at retail tobacco sales between 2013 and 2019 to ascertain what effect e-cigarette taxation has had on tobacco usage. Among other things, the researchers found that

  • 90 percent of e-cigarette taxes are passed on to the consumer
  • E-cigarette taxes reduce e-cigarette sales
  • E-cigarette taxes induce people to buy more traditional cigarettes

Specifically, the researchers found that every $1 increase in e-cigarette taxation increases “the sales of regular cigarettes by 4,863 packs per 100,000 adult residents.”

Put simply, raising taxes on e-cigarettes or banning vaping does not entirely stop people from using tobacco. People respond to incentives by changing their behavior. In the case of tobacco, people respond to e-cigarette taxes and bans on e-cigarettes by switching to traditional combustible cigarettes.

In Econ 101, we call this the substitution effect.