E-Cigarette and Cigarette Substitution from Taxation: Evidence from the Carolinas

This paper investigates the effect of e-cigarette taxes on cigarette consumption using evidence from North and South Carolina. In 2014, North Carolina introduced a $0.05 tax per millilitre of e-liquid sold. In South Carolina, e-cigarette taxes were not introduced. Tobacco taxes in both states were constant from 2011-22. The United States Behavioural Risk Factor Surveillance System (BRFSS) is used, which collects data by state from 2011-present for over 400’000 individuals’ responses to a questionnaire concerning behaviours including cigarette usage and frequency of usage. BRFSS data from 2011-2022 is used to estimate the effect of the e-cigarette tax on cigarette consumption, using a difference-in-differences model. Basic theory would suggest an increase in the relative price of e-cigarettes increases the consumption of cigarettes, if the two are substitutes. The tax did not have any immediate significant effect on the number of current smokers, but did significantly decrease the number of smokers 7-8 years after the tax’s implementation. This weakens the theorised relationship between increasing taxes on e- cigarettes and a substitution of consumer behaviour towards traditional cigarettes.