Setting Cigarette Tax Rates: The Competing Forces of Median Voter and Interest Groups

This study applies median voter theorem and special interest politics to explain the setting of cigarette tax rates in the 48 states of the United States between 19962000. We measure median voter’s preferences and political influence of special interest groups using CPS Tobacco Use Supplements and data from National Institute on Money in State Politics (NIMSP). Based on a theoretical framework provided by Grossman and Helpman (1996), we examine the competing forces of median voter and interest groups in setting state cigarette tax rates. Our preliminary results from OLS regressions show that state cigarette tax rates are affected by the political contribution from tobacco industry and party dominance. However, the effects diminish when estimated with fixed effect specifications. The median voter’s preference does not appear to play a significant role in state cigarette tax setting regardless of model specifications. (This empirical analysis is currently under revision in several aspects as described in the concluding section.) † This manuscript is in a preliminary form. Please do not cite or distribute. Interested readers are requested to direct their criticisms and suggestions to the authors and to clear any quotations by contacting Ming-Feng Hsieh (email: [email protected]) or Hui-chen Wang (email: [email protected]). * Department of Economics and National Poverty Center, University of Michigan, Ann Arbor, MI 48109.