TAXATION ON TOBACCO

During the final third of the twentieth century, taxes imposed on tobacco products, especially cigarettes, became a principal weapon in the war against tobacco-produced disease. A series of studies by economists demonstrated convincingly that increases in cigarette prices, driven by increases in cigarette taxes, reduced cigarette smoking. In particular, several studies indicated that tax-induced price increases were particularly effective in discouraging smoking by young people. Students of tobacco-control policy became convinced that taxation was one of the most effective tools available to policy makers to reduce smoking and hence its enormous toll on human health.

EXCISE TAXES

Each of the fifty U.S. states, the ten provinces of Canada, and their federal governments, as well as most countries throughout the world, impose product-specific taxes on cigarettes and, less frequently, on other tobacco products. Often called excise taxes, product-specific taxes are used sparingly by most governments. Rather, when they tax products at all, they typically do so with a general tax applied to all products, called sales taxes in the United States. Excise taxes are applied most frequently to three specific types of products: tobacco products, alcoholic beverages (wine, beer, and spirits), and gasoline.

Excise taxes are often motivated by the expectation that they will yield sizable revenues to governmental units, primarily because consumer demand for such products is relatively insensitive to their price. Alternatively (or sometimes concurrently), excise taxes are motivated by legislators' desire to reduce consumption of products deemed by society to be undesirable. Thus, in the case of cigarettes and alcoholic beverages, excise taxes are sometimes referred to as "sin taxes."

EFFECTS OF CIGARETTE TAXES

Historically, cigarette excise taxation has been motivated by both concerns. The demand for cigarettes is only modestly responsive to price changes. The consensus estimate is that, in developed countries, for every 10 percent increase in price, the quantity of cigarettes demanded by consumers will fall by about 4 percent. When one considers, however, that cigarette taxes constitute only a fraction of total cigarette price, one realizes that large increases in cigarette tax rates can simultaneously generate significant increases in governmental revenues and a substantial decrease in smoking. Thus, tobacco taxation gives governments the opportunity to do well in terms of enriching their treasuries while improving public health.

Studies suggest that smoking by young people is especially sensitive to cigarette price increases. In general, the older the age group considered, the less price responsive it appears to be. This makes considerable intuitive sense because, compared to younger smokers, older smokers tend to be more addicted and to have more disposable income to spend on cigarettes. The general consensus is that youth are approximately twice as price responsive as adults. Thus, a 10 percent increase in cigarette price should decrease smoking by youth by about 8 percent. As a consequence, many legislators and public health policy makers have called for increased cigarette taxation as a means of discouraging youth smoking.

By the end of the twentieth century, virtually all comprehensive tobacco control plans have included substantial increases in tobacco taxes as a fundamental component. Such plans call for increases in cigarette taxes as a means of both discouraging children from smoking and raising funds to pay for other tobacco control measures, such an antismoking education. In addition to being an effective deterrent to youth smoking, cigarette taxation offers an attractive political feature: Proposed cigarette tax increases are often popular with voters, including many smokers, especially when the revenues generated by the tax increases are directed toward prevention of youth smoking.

LIMITATIONS

Tobacco taxation is not devoid of controversy, however. Whenever a tobacco tax increase is proposed, opponents argue that the tax increase will be regressive, imposing a larger financial burden on the poor than on the rich. This is especially true because larger proportions of the poor population smoke than of the rich. The more highly educated population, which tends to be more affluent as well, has quit smoking in dramatic numbers in response to health education messages concerning the dangers of smoking.

Although the regressivity argument merits serious consideration, its importance should not be exaggerated. The impact is blunted by the fact that low-income smokers are more price responsive than high-income smokers, thus giving up smoking—and its concomitant impact on disease—in greater proportions than is the case among the rich. In public health circles, this progressively distributed health benefit is viewed as ample justification to promote increased tobacco taxation wherever and whenever possible. As a tool for tobacco control, substantial taxation may have no peer.

Kenneth E. Warner

(see also: Enabling Factors; Smuggling Tobacco; Tobacco Control )

Bibliography

Chaloupka, F. J., and Warner, K. E. (2000). "The Economics of Smoking." In Handbook of Health Economics, eds. A. J. Culyer and J. P. Newhouse. Amsterdam: Elsevier Science.

Grossman, M., and Chaloupka, F. J. (1997). "Cigarette Taxes: The Straw to Break the Camel's Back." Public Health Reports 112(4):290–297.

Warner, K. E.; Chaloupka, F. J.; Cook, P. J.; Manning, W. G.; Newhouse, J. P.; Novotny, T. E.; Schelling, T. C.; and Townsend, J. (1995). "Criteria for Determining an Optimal Cigarette Tax: The Economist's Perspective." Tobacco Control 4(4):380–386.