The Tax Incidence and Tax Pass-Through of Smokeless Tobacco in the US

Background: States adopt different tax bases on smokeless tobacco (SLT), making tax incidence on SLT not directly comparable across states. In addition, how taxes are passed through to SLT prices among states that impose specific taxes, and whether the pass-through rates for SLT are affected by the uptake and evolution of e-cigarettes is unknown. Objective: This study will calculate the tax incidence on SLT and investigate how SLT taxes are passed to prices at the 25th, 50th, and 75th percentile levels, as well as whether these pass-through rates vary by e-cigarette uptake and evolution. Methods: We regressed SLT prices on specific taxes using Ordinary Least Square regressions while controlling for state-, year-, and quarter-fixed effects. We then tested the difference in tax pass-through rates by different periods. Findings: The average tax incidence on chewing tobacco, moist snuff, dry snuff, and snus is 22%, 22%, 23%, and 20%, respectively. For moist snuff, taxes were fully passed to prices at the 25th and 50th percentiles and overly passed to prices at the 75th percentile. The e-cigarette uptake and evolution significantly raised taxes by 13 cents and 14 cents per ounce, respectively, for moist snuff at the 75th percentile prices. Conclusions: There is room to additionally raise SLT taxes. Given lower tax pass-through rates for lower-priced SLT, price promotion restrictions and minimum pricing laws may be needed to increase the cost of low-priced products. Tobacco companies increase tax pass-through to premium SLT as e-cigarettes grow popular, like the pricing strategy adopted for cigarettes.