State Tobacco Taxation, Education and Smoking: Controlling for the Effects of Omitted Variables

There is a potential bias in cross-sectional estimates of the effects of cigarette prices on cigarette consumption. States with the strongest antismoking sentiment will likely have the highest cigarette taxes, which result in the highest prices. Some of the lower consumption of cigarettes in high-tax states will result from such sentiments, rather than from higher taxes, so the estimated effect of cigarette taxes on consumption will be overstated. This study corrects for such bias, employing panel data for U.S. states from 1960 to 1990. We find that controlling for this bias reduces the estimated consumer response to cigarette price change by 40-50 percent.