The Future of the Cigarette Tax

May 6, 2013 — 1 Comment

Last month President Obama proposed nearly doubling the federal tax on cigarettes from its current rate of $1.01 per pack to $1.95. CNN Money reports the increased revenue, estimated at $78 billion/10 years, would be used to fund childhood education and reduce smoking rates.

If implemented, the administration will have raised the cigarette tax by more than 5 times its pre-Obama level of $0.39 per pack.

Cigarette taxes are a type of excise tax— taxes on purchases of a specific good, usually built into the cost of the item (not added later like a sales tax).  Gasoline, liquor, and tires also carry excise taxes.

Taxes on cigarettes are also known as “sin” or Pigovian taxes, which are levied on socially undesirable goods such as tanning, alcohol, gambling  and sugary drinks.

The push to raise the cigarette tax again has stirred a multi-lateral debate between public health experts, economists, social workers, and the tobacco industry.

Higher Taxes Reduce Smoking Rates

The President’s budget reads, “The proposed tobacco tax increase would have substantial public health benefits… Researchers have found that raising taxes on cigarettes significantly reduces consumption, with especially large effects on youth smoking.”  
That’s true.  Cigarettes are what economists call highly elastic, meaning that consumers change their behavior in response to changes in price.  While estimates vary between locations, ages and other variables, in general higher prices mean less smokers.  According to the American Journal of Public Health, raising cigarette taxes is an “effective public health intervention that can reduce cigarette consumption and its associated health consequences.”

The Campaign for Tobacco-Free Kids says that cigarette sales dropped by 10% after the 62-cent federal tax increase in 2009.
Critics argue the cigarette tax is regressive because it disproportionately effects the low income Americans.
In a study conducted by the New York State Department of health, researchers found that low-income smokers (individuals in households making less than $30,000 per year) spent an average of 23.6% of their annual income on cigarettes, compared to only 2.2% for smokers living in households earning over $60,000/year.  More than half of all smokers are low income, according to the Center for Disease Control (CDC); however, “because low-income groups are more responsive to price increases, increasing the real price of cigarettes can reduce cigarette consumption among low-income smokers by a greater percentage than among higher-income smokers, and thereby diminish socioeconomic smoking disparities.”

English: Excise Cigarette tax per state. Infor...

CIGARETTE TAXES BY STATE: Blue = less than $2 excise tax per pack, Purple = less than $4,  Red = $4 and above

Cigarette Taxes across the Nation

Cigarette taxes don’t end at the federal level. The average state tax on cigarettes is about $1.36, but varies from a high of $4.35 per pack in New York to just 17 cents in Missouri.

This variation presents challenges to revenue authorities in high cigarette tax states.  A lawmaker from Minnesota, said “hikes in the cigarette tax tend to decrease overall collections because they encourage consumers to buy their cigarettes on reservations or outside the state.”  Minnesota is one of several states now weighing legislation to increase taxes on cigarettes.

But most smokers don’t need to travel across state lines to find lower prices.  The Associated Press reports that more than half of all licensed tobacco retailers in New York City had cigarettes in their inventories from out of state.  In 2011, more than 60% of all cigarettes sold in New York were smuggled in from another state, according to the Mackinac Center for Public Policy.

The reason high smuggling rates is simple.  CNNMoney calculated that a smuggler who buys a tractor trailer full of cigarette cases in Virginia and sells them in New York could make nearly $2 million.

That’s why officials in Virginia this year made it a criminal offense to possess more than 25 cartons of cigarettes at a time.  Whether or not it makes a dent in the illegal cigarette trade remains to be seen.

The solution would be to only let the federal government tax cigarettes, but that would come as a blow to states that rely on cigarette taxes as a major revenue stream, many of which are already struggling to fill the budget gap left by cutbacks in smoking rates.  In Pennsylvania, for example, revenues from cigarette taxes decreased by more than 5% last year, costing the state about $40 million.

Some economists question whether or not its a good idea for states or the federal government to rely on cigarette taxes at all any more.  Higher prices and increased awareness have led smoking rates to decline steadily every decade:
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One response to The Future of the Cigarette Tax

    mother of dragons May 6, 2013 at 5:24 pm

    nice picture


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