To curb smoking and raise revenue, governments impose taxes on tobacco products.
The effectiveness of taxes is increased when all or much of the tax revenue is used to pay for smoking prevention and cessation programs.
What’s the issue?
Tobacco products are the only legally available products that can kill up to half of their regular users if consumed as recommended by the manufacturer. Tobacco use causes nearly six million deaths a year worldwide and more than 540,000 deaths in the United States. And 10 percent of that total comes from exposure to secondhand smoke.
Public health officials try to reduce smoking in many ways—from smoke-free policies to targeted mass media campaigns to raising the legal purchasing age from eighteen to twenty-one. Other tactics include graphic warning labels, plain packaging, and the elimination of smoking in youth-rated movies. Like many of these interventions, taxing tobacco products works on multiple fronts: convincing some people to quit entirely, stopping others from becoming regular smokers, and discouraging former smokers from starting again. And its effectiveness is increased when all or much of the tax revenue is used to pay for smoking prevention and cessation programs.
While the price elasticity of tobacco demand varies depending on the demographic, the rule of thumb in the United States is that a 10 percent price increase on a pack of cigarettes results in anywhere from a 2.5 percent to a 5.0 percent overall decline in smoking, with most studies showing an average 4.0 percent drop.
Many studies have found that the impact is more pronounced on teen smoking, which can fall as much as three times that amount. There are several reasons for this: Younger smokers have been smoking a shorter time than older smokers and are likely less addicted; they have less money, so they are more sensitive to price hikes; and teenagers tend to be more present-oriented than adults, and so react more immediately to price hikes. The effect, however, is not universal: Some teenagers just starting to use tobacco might smoke only one or two cigarettes a week, so a price hike would have only a minimal impact.
Nevertheless, the addictive quality of smoking means that it is often difficult for people to stop smoking immediately. As a result, the long-term impact on reducing tobacco use through higher taxes can be twice as much as the short term.
Because the effect of a tax increase depends on its magnitude, tobacco taxes must occur in sizable increments to make a significant dent in smoking rates. For cigarettes, that means at least 50 cents per pack but ideally $1–$2 per pack. Anything less, and the cost is too easily absorbed and barely noticed. Tobacco companies can also quickly offset smaller tax hikes by offering discounted prices or distributing coupons.
The fifty states and the District of Columbia all tax cigarettes but at wildly varying rates—from 17 cents a pack in Missouri (by far the lowest) to $4.35 in New York State. Some counties and cities also add their own taxes. In Chicago, for example, the combined federal, state, county, and city taxes are $7.17 per pack, the highest in the country.
The proper taxation rate for e-cigarettes remains a major question in tobacco-control circles and hinges on whether one believes they ultimately are a net plus or a net minus for public health.
Although many states have considered taxing e-cigarettes, as of mid-2016, according to the Campaign for Tobacco-Free Kids, only six states—Kansas, Louisiana, Minnesota, North Carolina, West Virginia, and Pennsylvania, whose tax goes into effect on October 1, 2016—and seven cities and counties had passed laws to tax e-cigarettes. In North Carolina the tax, which was promoted by the locally based tobacco giant R.J. Reynolds, is negligible, a nickel per milliliter of consumable nicotine liquid. In Minnesota it’s at the same 95 percent rate applied to other tobacco products.
Meanwhile, the Obama administration has proposed an increase of 94 cents in the federal cigarette excise tax in its latest budget for fiscal year 2017, the same amount it has recommended for the past few years. The additional tax would raise almost $100 billion over ten years to fund early childhood education programs. There’s little chance the Republican-controlled Congress will act on the proposal.
States and municipalities remain the most fertile ground for additional cigarette taxes, which as of the summer of 2016 averaged $1.65 a pack. Tobacco taxes retain widespread bipartisan public support and provide states with one of the few ways to raise revenue that does not spark blanket opposition. Just this year alone, West Virginia more than doubled its tax on a pack of cigarettes effective July 1, 2016, from 55 cents to $1.20, while Pennsylvania’s tax jumped by one dollar to $2.60 a pack beginning August 1, 2016.