When smoking bans were debated in the past, the economic costs were seldom considered. But that's changing, as studies reveal the costs being paid by bars, restaurants and casinos, as well as by employees of these establishments.Tobacco industry

Michael R. Pakko

English

Research Papers in Economics

W
hen making decisions about adopt-
ing smoke-free laws, advocates often 
give policymakers a Pollyannaish outlook in 
which communities can achieve public health 
benefits with no economic consequences.  In 
particular, the lack of statistically significant 
economic effects is interpreted as indicating 
an absence of economic costs.  Recent eco-
nomic research indicates that this is a far too 
simplistic view of the issue.
A previous article in The Regional Econo-
mist (“Peering Through the Haze,” July 
2005) described some early evidence on the 
economic impact of smoke-free laws and 
suggested that the findings were far from 
conclusive.1
As more communities have adopted 
smoke-free laws and more data have been 
gathered, economists have discovered new, 
significant findings.  As an earlier article 
suggested, economic costs often focus on 
specific business categories—those that 
smokers tend to frequent.
Gambling and Smoking
Several papers have examined the cost 
of smoke-free laws on the gambling busi-
ness, using data from slot machine revenue 
at Delaware racetracks (“racinos”).2  Recent 
economic research finds conclusive evidence 
of revenue declines at the racinos after the 
Delaware Clean Indoor Air Law took effect  
in December 2002.
In my recent research on the topic, I find 
statistically significant losses at all three Dela-
ware racinos—ranging from 8.9 percent to 
17.8 percent.3  Overall, the statewide revenue 
New Evidence on the Economic Impact of Smoking Bans
Clearing the Haze?
This article is based on a presentation at the 
Sixth Annual ERIE Conference on Local Gov-
ernment and Economics, Erie Pa., Aug.14, 2007.
By Michael R. Pakko
Smoking BanS
a higher ratio of smokers to nonsmokers  
than the national average, employment 
losses at bars were significantly larger, and 
the employment changes at restaurants went 
from a small positive effect to a small negative 
effect (in neither case, statistically significant).   
Climate also affected restaurant employment.5  
Restaurants in warm climates fared better 
than those in cooler climates.  The authors 
suggest that the reason for this might be that 
restaurants in warmer climates can more 
easily provide outdoor seating where smok-
ing is not prohibited.  (See also the sidebar on 
Columbia, Mo.)  Restaurants that suffered 
the dual curse of being in regions with colder 
climates and a high prevalence of smokers 
suffered statistically significant employment 
losses, on average.
California Dreamin’
Another recent economic study examines 
taxable sales receipts of bars and restaurants 
in California, the home of the smoke-free 
movement.  Because California communi-
ties passed some of the nation’s first smoke-
free laws, much of the early evidence on the 
subject was based on these data on California 
taxable sales receipts; as time has passed, 
those data have accumulated.  The experience 
of California also provides a case in which a 
statewide smoking ban was superimposed on 
a patchwork of local smoke-free laws, provid-
ing useful variation in the coverage and juris-
diction of smoking bans that can be exploited 
in empirical analysis.
decline was 14.9 percent.  Using slightly differ-
ent methods that estimate demand for casino 
gambling, economists Richard Thalheimer 
and Mukhtar Ali estimate the total revenue 
loss at 15.9 percent.
These revenue estimates may significantly 
understate profit losses.  For example, the 
racino that suffered the smallest loss in 
revenues—Dover Downs—also was the only 
one with a luxury hotel on site.  Dover Downs 
management responded to initial revenue 
losses by offering more discounts on hotel 
rooms.4  Efforts to prop up revenue may have 
been partly successful, but at a cost to the 
bottom line.
Evidence on the effect of smoking bans on 
gaming revenue shows that when analysis can 
be narrowly focused on data from specific 
businesses, statistically significant findings 
emerge.  Another approach is to use very large 
data sets.  As smoking bans have spread across 
the country, the variety and timing of adopt-
ing smoke-free laws have generated data that 
can help identify effects.
Bar and Restaurant Employment
Two papers, one by Ryan Phelps and the 
other by Scott Adams and Chad Cotti, have 
used data available from the Bureau of Labor 
Statistics to examine the employment effects 
of smoking bans.  Using nationwide county-
level data, these two studies examine the 
changes in employment at bars and restau-
rants after communities adopt smoking bans.  
Neither study finds significant employment 
changes at restaurants, on average, but both 
find statistically significant employment 
declines at bars, with loss estimates ranging 
from 4 percent to 16 percent.
Adams and Cotti also examine some addi-
tional factors.  For communities in states with 
10   The Regional Economist  |  January 2008Economists Robert Fleck and Andrew 
Hanssen analyzed quarterly restaurant sales 
data for 267 California cities over 25 years.  
They find that the measured impact of smok-
ing bans differs between local bans and the 
statewide ban.  In what the authors call their 
“naïve” specification that treats all smoke-free 
laws the same, they find a statistically signifi-
cant 4 percent decline in revenues associated 
with smoking bans.
When they estimate the effects of the state-
wide ban and local bans independently, they 
find that the measured decline in restaurant 
sales is attributable to the statewide ban on 
cities without local bans.  The measured effect 
of the statewide ban is nearly 4 percent, and 
it is statistically significant.  The independent 
effect of local smoking ordinances is estimated 
to be very small and is not significant.  These 
findings are consistent with the interpretation 
that locally originated smoking bans have lit-
tle effect, but smoking bans that are imposed 
on a community by a higher jurisdiction can 
have a detrimental economic impact.
Fleck and Hanssen go on to uncover an 
important specification problem:  They find 
e n dno t e s 
 1 Scollo et al. (2003) provide a review of previ-
ous literature, much of which has been pub-
lished in medical and public health journals.
 2 Previous studies of the Delaware racino case 
study have been published—and disputed—
in the public health journal Tobacco Control.
 3 See Pakko (forthcoming).
 4 See Dover Downs (2004).
 5 Bar employment was not significantly affected 
by climate differences.
 6 See Pakko (2007).
 7 See Solberg (2007).
RefeRences
Adams, Scott; and Cotti, Chad D.  “The Effect of 
Smoking Bans on Bars and Restaurants: An 
Analysis of Changes in Employment.”  The 
B.E. Journal of Economic Analysis & Policy: 
Vol. 7, Issue 1, Contributions, Article 12.  See 
www.bepress.com/bejeap/vol7/iss1/art12.
See Dover Downs Gaming and Entertainment 
Inc. Annual Report for the Fiscal Year ended 
Dec. 31, 2003 (2004).
Fleck, Robert K.; and Hanssen, F. Andrew.  
“Why Understanding Smoking Bans is 
Important for Estimating Their Effects:  
California’s Restaurant Smoking Bans and 
Restaurant Sales.”  Economic Inquiry (forth-
coming).
Pakko, Michael R.  “The Economics of Smok-
ing Bans: Peering Through The Haze.”  The 
Regional Economist, Federal Reserve Bank of 
St. Louis, July 2005, pp. 12-13.
Pakko, Michael. R.  “No Smoking at the Slot 
Machines: The Effect of Smoke-Free Laws 
on Gaming Revenues.”  Applied Economics 
(forthcoming).
Pakko, Michael R.  “The Economic Impact of a 
Smoking Ban in Columbia, Missouri:  A Pre-
liminary Analysis of Sales Tax Data.”  CRE8 
Occasional Report, Dec. 11, 2007.  See http://
research.stlouisfed.org.regecon/op/CRE8OP-
2007-002.pdf.
Phelps, Ryan.  “The Economic Impact of 100% 
Smoking Bans.”  Kentucky Annual Economic 
Report 2006, Center for Business and Eco-
nomic Research, Gatton College of Business 
and Economics, University of Kentucky, 2006, 
pp. 31-34.
Thalheimer, Richard; and Ali, Mukhtar M.  “The 
Demand for Casino Gaming with Special Ref-
erence to a Smoking Ban.”  Economic Inquiry 
(forthcoming).
Scollo, M.; Lal, A.; Hyland, A.; and Glantz, S.  
“Review of the Quality of Studies on the Eco-
nomic Effects of Smoke-free Policies on the 
Hospitality Industry.”  Tobacco Control, 2003, 
Vol. 12, pp. 13-20.
Solberg, Christy.  “Effects of Smoking Ban Still 
Debated.”  Columbia Missourian, Sept. 27, 
2007.  See www.columbiamissourian.com/
stories/2007/09/27/effects-smoking-ban-still-
debated/.
s
ince January 2007, all bars and restaurants in 
Columbia, Mo., have been required to be smoke-
free.  only some sections of outdoor patios are 
exempt from the requirement.
some local businesses have continued to oppose 
the Columbia Clean air ordinance, circulating peti-
tions to repeal the law by ballot initiative.  according 
to local press reports, owners of at least four estab-
lishments have cited the smoking ban as a factor in 
their decision to close their doors in 2007.
recent data from the city of Columbia show a 
distinct decline in sales tax receipts at bars and 
restaurants.  after rising at an average rate of  
6.8 percent from 2002 through 2006, tax revenue  
declined at an annual rate of 1.3 percent over the 
first seven months of 2007.  (see graph.)  although 
the data are still preliminary, initial analysis suggests  
a 5 percent decline in overall sales revenue at Colum-
bia dining establishments since the implementation 
of the smoking ban.  This estimate takes into account 
past trends, seasonal fluctuations in the data and an 
overall slowdown in sales tax revenue in Columbia.
6 
one interesting feature of the Columbia story is 
the response of restaurant owners to the patio  
District Focus: Smoking Ban Singes Columbia, Mo.
YEAR-OVER-YEAR GROWTH 
02 03  04 05 06   07
15
10
5
0
–5
SOURCES: City of Columbia, Mo., and author’s calculations
July
Columbia, Mo., Dining Tax Revenue
exemption.  according to an article in the Colum-
bia Missourian, owners of at least two bars are 
building or planning outdoor patio expansions.  
one owner was quoted as saying, “You have to 
have a patio to survive.”
7  The expenses associ-
ated with these renovations may help buffer the 
sales revenue of these establishments, but they 
also represent profit losses that are above and 
beyond the measured sales declines.
that cities that adopted smoke-free laws were 
systematically different from those that did 
not.  The authors find that sales growth tends 
to be a predictor of smoking bans, rather than 
the other way around.  This “reverse causal-
ity” calls into question many earlier findings, 
and it poses problems for using data from 
California in drawing inferences about the 
economic impact of smoking bans elsewhere.
The Role of Economic Research 
Economic effects of smoke-free laws may 
be difficult to identify and interpret, but 
analysis suggests that at least some businesses 
do suffer costs.  When they consider passing 
smoking bans, policymakers should study 
evidence both from public health profession-
als and from economists. 
Michael R. Pakko is an economist at the Fed-
eral Reserve Bank of St. Louis.  To see more of 
Pakko’s work, go to http://research.stlouisfed.
org/econ/pakko/index.html.
The Regional Economist  |  www.stlouisfed.org   11

Clearing the haze? new evidence on the economic impact of smoking bans

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Clearing the haze? new evidence on the economic impact of smoking bans

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