PART I: Calculating the Base Year (2005)
We followed these steps in developing our base year estimates:
- We calculated the average consumer expenditure (in
dollars/year) on tobacco products (aggregate, which includes
cigarettes, cigars, smokeless, etc.) for the typical consumer unit
in each socioeconomic category (all, age, race, income). Note:
There are approximately 2.5 people per consumer unit, although this
statistic varies by socioeconomic indicators. Source: U.S.
Department of Labor, Bureau of Labor Statistics, "Consumer
Expenditures in 2005," Report 998, p. 3, at www.bls.gov/cex/csxann05.pdf.
- We found the total number of consumer units in each
demographic. Source: Ibid.
- We multiplied the number of consumer units in each demographic
and the average amount spent on tobacco products by members of each
demographic to obtain the total expenditure on tobacco products by
- We calculated the fraction of total tobacco consumption that
each demographic group consumes by dividing total expenditure on
tobacco products into the demographic's respective subtotals of
tobacco product consumption. We assumed the same ratio to hold for
- After finding the total domestic consumption of cigarettes (in
number of cigarettes), we multiplied this fraction by the total to
find each demographic's consumption of cigarettes. Source: U.S.
Department of Agriculture, "Table 1-Cigarettes: U.S. output,
removals, and consumption, 1996-2006," April 2007, at www.ers.usda.gov/Briefing/Tobacco/Data/table01.pdf.
- The implicit average price of cigarettes per pack was found by
dividing the total expenditures on cigarettes by the total number
of cigarettes sold. This gives an average price per cigarette. We
divided by 20 to get the implicit average price per pack. Sources:
U.S. Department of Agriculture, "Table 21-Expenditures for tobacco
products and disposable personal income, 1989/2006," at www.ers.usda.gov/Briefing/Tobacco/Data/table21.pdf,
and U.S. Department of Agriculture, "Table 22--Governmental
revenues from tobacco products, 1991/92-2004/05," March 2006, at
- We compared this implicit price to other average prices and
found them to be similar.
- We found the elasticities for each of the demographic
categories. We converted the original categories from which we
calculated consumption data to match the socioeconomic categories
for which elasticities were calculated. For example, elasticities
were given in an "under 25" category. So, we assumed "under 25" to
mean 18-25 so it would match the previous demographic. We assumed
surveys of children are not often taken or have little impact on
the result. Elasticities were also only given in the 25-39 and 40+
ranges. We assumed the original 35-44 category to be evenly
distributed among the ages. We divided the number of cigarettes
consumed by the 35-44 demographic as well as revenue by two and
added it to the already given categories of 25-34 to match it with
the 25-39 category of elasticity. The other half of the 35-44
category was added to the remaining categories from the original
data. This comprised the 40+ category. We encountered a similar
problem with income. The original data was divided by increments of
varying degrees whereas elasticities were divided into above or
below median income. Median income was given as $56,304 per
consumer unit. The income range in the original data was
$50,000-$69,999. Then we divided $19,999 (the range of values,
namely $69,999-$50,000) by $6,304 ($56,304-$50,000) to get the
weighted importance of the values in this original range that were
below the median. Then, we multiplied that number by each
demographic's consumption of cigarettes and revenue to obtain the
consumption and revenue of those people with incomes between
$50,000 and $56,304. We added these values to the values of all
other incomes below the median. Likewise, the remaining consumption
and revenue values (those with incomes between $56,304 and $69,999)
were added to the other incomes above $70,000 to get the values for
consumers with income above the median. Source: Farrelly et al.
"Response by Adults to Increases in Cigarette Prices by
Sociodemographic Characteristics." Southern Economic
Journal, Vol. 68, No. 1, 2001, pp.156-165.
- Next, we used the elasticities for each demographic, the values
previously found for quantity consumed by each demographic group,
and the implicit price found for a pack of cigarettes to find the
change in quantity consumed per demographic for a 61-cent increase
in the price of a pack of cigarettes.
- We found the new quantity of cigarettes consumed by adding the
change in quantity and the previous quantity.
- Finally, we calculated the revenue by multiplying the 61-cent
tax increase by the quantity of packs of cigarettes now sold per
demographic, and then summed all the revenue to obtain the total
revenue from the 61-cent tax increase.
PART II: Projecting
We followed these steps in creating our projections.
- We projected total U.S. consumption of cigarettes per year, per
capita, for 2006-2012 simply by extending the linear rate of change
for the same figure calculated from 1996-2005 historical data from
the USDA and then multiplying this projection by the projected
population. Sources: For a description of CBO's methodology for
projecting cigarette tax revenues, see Congressional Budget Office,
"Description of CBO's Models and Methods for Projecting Federal
Revenues," May 2001, p. 27, at www.cbo.gov/ftpdocs/28xx/doc2807/RevenueProjections.pdf.
For 1990s population estimates, see U.S. Census Bureau, "Resident
Population Estimates of the United States by Age and Sex: April 1,
1990 to July 1, 1999, with Short-Term Projection to November 1,
2000," January 2, 2001, atwww.census.gov/popest/archives/1990s/nat-agesex.txt.
For population estimates from years 2000-2006, see U.S. Census
Bureau, "Annual Estimates of the Population by Five-Year Age Groups
and Sex for the United States: April 1, 2000 to July 1, 2006,"
. For 2006+ projects, see U.S. Census Bureau, "U.S. Interim
Projections by Age, Sex, Race, and Hispanic Origin," March 18,
2004, at www.census.gov/ipc/www/usinterimproj/.
- We projected average cigarette prices for 2006-2012 by
extending the linear rate of change in implicit average cigarette
prices calculated from 1996-2005 historical data on U.S.
expenditures on cigarettes, combined with the above historical data
on quantity consumed.
- We consolidated the base year (2005) consumer expenditure data
into categories compatible with the elasticity statistics we used.
First, we summed the number of consumer units in the
consumer-expenditure subcategories to get the number of consumer
units in each elasticity-compatible sub category. Where the range
of an elasticity subcategory split the range of one of the consumer
expenditure subcategories, a method was used similar to that
described in step 9 of Part I. Next, we generated an average
consumer expenditure statistic for each elasticity subcategory by
weighting the average consumer expenditure attributable to each
consumer expenditure subcategory by the fraction represented by the
number of consumer units in that consumer expenditure subcategory,
divided by the number of consumer units in the elasticity
subcategory in which it falls (if it falls in two elasticity
subcategories equally, the weight is divided by two). The products
of the average consumer expenditures and the weights were summed
over all consumer expenditure subcategories in a given elasticity
- The number of overall consumer units and the number of consumer
units in each elasticity (sociodemographic) subcategory was grown
by the rate of growth predicted by the U.S. Census in its interim
projections for persons (aged 18+) matching the characteristics of
that reference persons in the consumer unit subcategories. Although
persons and consumer units are not the same, we had no basis for
projecting changes in the number of persons per consumer unit over
time, and so we presumed that the ratio of persons per consumer
unit was constant across the time, allowing us to apply growth
rates derived from population data to consumer units. The number of
consumer units in each subcategory was then rescaled by multiplying
it by the projected overall number of consumer units for that year
divided by the sum of the projected consumer units across all
subcategories in a particular sociodemographic dimension. Source:
U.S. Census Bureau, "U.S. Interim Projections by Age, Sex, Race,
and Hispanic Origin," May 31, 2007, at www.census.gov/ipc/www/usinterimproj/.
- The average consumer expenditures for each consumer unit were
projected by dividing the figure from the previous year by the
previous year's (projected or known) average price per pack to get
quantity packs. The elasticity for that subcategory of consumer
unit was then multiplied by this quantity, divided by the price for
the previous year, and multiplied by the difference between the
projected current-year price and the previous-year price. This gave
us the change in quantity packs, to which we added the original
quantity packs, and multiplied by the projected current-year price
to arrive at projected current-year average consumer unit
- We multiplied the projected average consumer unit expenditures
by the number of consumer units in each subcategory, arriving at
total expenditures by subcategory on tobacco. This total was then
rescaled by multiplying it by the projected overall consumer unit
expenditures on tobacco for that year divided by the sum of the
projected expenditures across all subcategories in a particular
sociodemographic dimension. Finally, the fraction of total
consumption attributable to a given sociodemographic subcategory
was calculated by dividing the consumption attributable to that
subcategory by the overall consumption for that year.
- The rest of the process was the same as for the base-year
- We reduced final revenue estimates by 0.25 of the total, to
account for the offset attributed to a reduction of income and
payroll tax receipts attributable to the increase in excise taxes.
See Joint Committee on Taxation, "Overview of Revenue Estimating
Procedures and Methodologies Used by the Staff of the Joint
Committee on Taxation," February 2, 2005, at www.house.gov/jct/x-1-05.pdf.
- Finally, we constructed fiscal year estimates simply by adding
one-quarter of revenue projected for the previous year and
three-quarters of projected revenue for the current
PART III: Descriptive Statistics
- The final revenue projections for the years 2008-2012 were
recorded. Then the average annual rate of change in revenues was
calculated for these years and used to extend linearly the trend to
arrive at figures for years beyond 2012.
- The baseline projections for number of packs consumed were
recorded. The current tax rate of 39 cents per pack was multiplied
by these figures to arrive at projected tax revenues under the
status quo. Then the average annual rate of change in revenues was
calculated for these years and used to extend linearly the trend to
arrive at figures for years beyond 2012. These numbers were then
compared to the numbers calculated above in graph form. The
distance between the two steadily declined in time.
- The number of smokers per year was estimated by taking 0.21
times the Census projected total populations for each future year.
Sources: U.S. Census Bureau, "U.S. Interim Projections by Age, Sex,
Race, and Hispanic Origin," March 18, 2004, at www.census.gov/ipc/www/usinterimproj/, and
U.S. Department of Health and Human Services, "Health Data for All
Ages," Smoking among adults: US, 2000-2005, at http://184.108.40.206/hdaa/ReportFolders/
- We recorded the number of cigarette packs consumed per year,
per capita, projected for 2008 (see Part II). Next, we calculated
the proportion of the predicted 2008 U.S. population aged 18+.
Finally, we divided the average number of packs per capita by the
above proportion and then divided the result by 0.21 to get the
average cigarettes per smoker projected for 2008, holding the
proportion of the adult population that smokes cigarettes
- We developed revenue targets for each year. To do this, we
recorded a historical average of annual percentage changes in
medical prices for the years 2000-2006 (4.29%). We next calculate
the amount of expenditures needed per year to provide the same
amount of medical care each year. Source: Bureau of Labor
Statistics, "Consumer Price Index Detailed Report Tables," 2006, at
- We held the number of smokers as a constant fraction (0.21) of
the projected population for each of the years examined and
calculated how many additional packs would have to be consumed by
each in order to achieve the annual revenue target. We subtracted
the projected revenue for each year in question from the revenue
target for that year. We then divided by 0.61 (the proposed
increase in the federal excise tax rate per pack) to obtain the
packs needed to make up this deficit. Finally, we divided by the
number of projected smokers for that year.
- We held the number of packs per smoker constant using the
numbers estimated in step 4 above. Again, we subtracted the
projected revenue for each year from the revenue target for that
year and divided by 0.61 to obtain the packs needed to make up this
deficit. Finally, we divided by the average number of packs per
smoker, as estimated in step 4 above.
William W. Beach
is Director of, and Andrew Nowobilski is an Intern in, the Center
for Data Analysis at The Heritage Foundation.