It is well known that African Americans (hereinafter, Blacks) have the highest percentage of menthol cigarette use among all races (Villanti et al. 2016). For instance, about 77% of Black smokers use menthol products while only 25% of white smokers do.1

Menthol cigarettes are flavored with menthol, which creates a cooling and anesthetic effect that masks the harshness of smoke (Gardiner and Clark 2010; U.S. Food and Drug Administration 2013). Although the findings are mixed, some research suggests that menthol smokers tend to inhale more deeply, hold smoke in their lungs longer, and show a higher level of nicotine addiction than non-menthol smokers (e.g., see Clark et al. 1996; U.S. Department of Health and Human Services 2020; U.S. Food and Drug Administration 2013, 2022; Watson et al. 2017). However, according to a U.S. Food and Drug Administration (2022)’s review of prior research, there is insufficient evidence to conclude that menthol in cigarettes is associated with altered smoking topography, such as deep inhalation, or that menthol in cigarettes is associated with dependence among adults. Furthermore, the evidence, although suggestive, is insufficient to conclude that restricting the sale of menthol cigarettes increases smoking cessation (U.S. Department of Health and Human Service 2020). Another concern is that Blacks have the highest incidence of lung cancer and other smoking-related diseases although they have similar smoking rates as whites (American Cancer Society 2015; Centers for Disease Control and Prevention 2020a; Kitts 2019; Schoenborn 2013).2

Racial disparities in menthol cigarette use are part of the reasons for the FDA's recent proposal to ban menthol cigarettes in the United States (Kaplan 2021).3 However, opponents of the proposal argue that banning menthol cigarettes may lead to increased cigarette smuggling, reduced tax revenues, and even aggressive policing in Black communities. Using sales data from Canadian provinces, Carpenter and Nguyen (2020) show that smokers evade provincial menthol bans by shifting cigarette purchases toward First Nations reserves where menthol bans do not apply. Although another reason for the FDA's proposed ban is to decrease youth smoking initiation, recent shifts in historical smoking patterns suggest that this rationale might be less compelling. The current smoking rate among Black youth is lower than that among non-Black youth, and the smoking rates for each of these youth groups is around 1 percent (Miech et al. 2023).

A more conventional method of reducing menthol cigarette use would be to increase cigarette taxes. If Black menthol smokers are responsive to cigarette price increases at all (i.e., not perfectly price inelastic), increasing cigarette taxes would effectively reduce the consumption of menthol cigarettes among Blacks. The effectiveness of taxes to reduce Black menthol smoking depends on the extent to which taxes are passed through to prices paid by Black menthol smokers.

This study aims to conduct an exploratory empirical analysis of whether tax pass-through rates differ by race/ethnicity of smokers and product type (menthol and non-menthol cigarettes). Economic theories of taxation do not offer clear guidance on cigarette tax pass-throughs. One simple prediction is that in a perfectly competitive industry with a constant marginal cost, an excise tax will be fully passed through to consumer prices. However, the cigarette industry is an oligopoly in which several large firms have substantial market power. Different theoretical models of imperfectly competitive markets provide different predictions about tax pass-through rates (Anderson et al. 2001; Barnette et al. 1995; Seade 1985). Thus, the tax pass-through rates by race and product type are an empirical question.

We examine whether the incidence of cigarette taxes on menthol products varies with race. We employ 2008–2014 Nielsen Homescan data to estimate the rate at which cigarette excise taxes are shifted to consumer prices across race and products. The data contain consumer prices at the Universal Product Code (UPC) level paid by 30,802 households across 48 continental states and the District of Columbia. The Nielsen Homescan data are ideal for our research because they provide the identity (such as race and income) and location of consumers, and the type of products purchased. This allows effective identification of the racial heterogeneity in how consumer prices of menthol product respond to cigarette taxation. Only a few studies on cigarette tax incidence have used household-level purchase data with complete lists of products.

We find that cigarette taxes are shifted at significantly lower rates to Black buyers of menthol cigarettes than any other buyers. For instance, a 1 dollar increase in state cigarette excise taxes leads to a full 1 dollar increase in menthol cigarette prices for white buyers (i.e., full shifting of taxes) but leads to only a 0.675 dollar increase for Black buyers.

A potential explanation for the racial difference in tax shifting is that Black menthol smokers might be more responsive to cigarette prices than other smokers. On the supply side, this may explain why cigarette manufacturers and retailers target price promotions to Black menthol smokers. The tobacco industry has long targeted Blacks for the sale of menthol cigarettes by distributing free samples, offering price discounts, and sponsoring special events (Centers for Disease Control and Prevention 2020a, 2020b; Center for Public Health Systems Science 2014; Kaplan 2021; Mills et al. 2018; Tobacco Products Scientific Advisory Committee 2011; Richardson et al. 2015; U.S. Food and Drug Administration 2013).4 For instance, extensive studies have shown that retail advertising and price promotions for menthol products are more common in areas with more Black residents (Lee et al., 2015; Mills et al. 2018; Widome et al. 2013). In line with these studies, we find that the racial difference in pass-through rates (i.e., taxes are shifted at lower rates to Black menthol smokers) is more significant in areas with a larger Black population. More specifically, we find evidence that Black smokers receive significantly more price discounts for their purchase of menthol products than white menthol buyers. Our results are generally robust to other reasons that may explain the lower pass-through for Black menthol buyers, including searching for volume discount (packs versus cartons), switching product qualities (generic versus premium cigarettes), and cross-state tax avoidance opportunity.

Our findings indicate that increasing cigarette taxes would effectively reduce menthol cigarette use among Blacks because the tax pass-through rate for Black menthol smokers (approximately 0.675) is still substantially above zero. Whether the tax increase also reduces racial disparities in menthol smoking depends on the relative price elasticity of demand between Black and white menthol smokers. If Black menthol smokers are substantially more responsive to cigarette prices than white menthol smokers, increasing taxes could decrease Black menthol smoking more than white menthol smoking.

Only a few studies have examined the incidence of cigarette excise taxes by race or product (i.e., menthol and non-menthol). DeCicca et al. (2013) use data from the Current Population Survey (2003 and 2006–2007) and find that the estimated rates of tax shifting are not statistically different between smokers of menthol and nonmenthol cigarettes. However, we show that the average rate of tax shifting by product (menthol and non-menthol) masks substantial differences by race. Using store-level scanner data across 53 US cities, Kim and Lee (2021) find that the rates of tax shifting for both menthol and non-menthol products are smaller in cities with a larger Black population. However, their use of city-level demographics is limited because many US cities are residentially segregated by race. Even in a city with a large Black share of population, some neighborhoods have mostly white consumers.5

Harding et al. (2012) employ the Nielsen Homescan data (as in our study), which contain each consumer's location and demographic characteristics. Harding et al. (2012) focus on cross-state tax avoidance: Cigarette taxes are less than fully shifted to consumer prices owing to cross-state tax avoidance. They also find that cigarette tax incidence varies by household income and education. However, they do not consider the differences in tax shifting by race or product (menthol and non-menthol).

The remainder of this paper is organized as follows. In Section 2, we explain why the incidence of cigarette excise taxes on menthol products may vary by race. Section 3 describes the data, and Section 4 explains the empirical strategy. In Section 5, we present the empirical findings. Section 6 provides the conclusion.