Demand for Cigarettes and Tax Increases in El Salvador

Objective: Analyze short- and long-term elasticities of demand for cigarettes in El Salvador as a tool for supporting recommendations on tax increases to reduce prevalence and consumption through price increases.

Methods: Demand for cigarettes in El Salvador was analyzed through an econometric time-series model using a database from El Salvador’s General Directorate of Internal Taxes (DGII) and the General Directorate of Statistics and Census (DIGESTYC). The analysis period was quarterly: 2000Q1-2012Q4. The usual tests were done to prevent a spurious econometric estimation. It was found that the variables volume sales, actual sale prices, and actual per capita income exhibited first-order cointegration; this result makes it possible to use an error correction model with short- and long-term elasticity estimates.

Results: Only long-term elasticities were found to be statistically significant to 5%. Results show long-term price elasticity (5 quarters) of –0.9287 and income price elasticity of 0.9978.

Conclusions: Absolute price elasticity is somewhat high, although it is within the levels estimated in other studies in low per-capita income countries. A tax increase from a base amount of US$1.04 per pack of 20 cigarettes to US$1.66 within three years would reduce demand by 20% to 31% and would increase tax revenues by 9% to 22%.