State cigarette taxes and health expenditures: Evidence from dynamic spatial lag panel models

This study explores the relationship between state cigarette taxes and state expenditures on health and hospitals. We address two major sources of endogeneity from (i) the relationship between tax rates and expenditure decisions and (ii) spatial dependence in expenditure policies by using tobacco production as an instrument for cigarette tax rates and through a dynamic spatial Durbin model. We estimate the cigarette tax rate expenditure elasticity to be 0.03 (SR) and 0.87 (LR) for state health spending and 0.05 (SR) and 0.79 (LR) for state hospital spending. Increases in cigarette taxes did not reduce state spending on health over this period.