The Health Care Consequences of Smoking and Its Regulation

The literature on the health economics of smoking presents twoprincipal facts: (1) that smoking increases health care costs and (2) that restrictions on smoking lead to reductions in smoking prevalence and intensity. Someresearchers have hypothesized that these two facts, in combination, allow the inference that restricting smoking will lower health care costs. For various reasons, however, observed associations between smoking and health care use on the one hand, and regulations and smoking on the other, do not imply a causal effect of the restrictions on health care.
This article extends the literature by examining whether cigarette tax increases lead to lower health care costs. Using data from the 1991 and 1993 National Health Interview Surveys, it first reproduces the principal results in the literature on smoking, taxes, and health care utilization, and then estimates the effects of tobacco taxes on health care. The results indicate that once one controls for endogenous quits, the health care benefits of smoking cessation are greater than previously believed. Weak evidence suggests that tax increases lead to higher cessation rates. In combination, these results suggest that, in addition to providing a source for funding excess health care costs, tax increases may lower health care costs (for given longevity) directly by inducing smokers to quit.