Cigarette Taxes

Honors Economics
8 October 2012 Cigarette Taxes The interest in cigarette taxes and their effects have been a hot topic in relation to the economy for the past 20 years. People question whether or not increased taxes really affect the demand. Do the taxes cause effects other than a change in demand? Who does this ultimately effect, the rich or poor? Where does the money go? So why does the government decide to impose higher cigarette taxes? They do this for two main reasons. One reason is to reduce the number or smokers. The second reason is to increase government revenue. The biggest problem with this though it that studies have found that raising taxes does decrease users therefore decreases the amount of revenue coming in.
The big question with increasing cigarette taxes is will it really have the desired effect of decreasing the demand. There are two sides to this. One side says that the price is most defiantly elastic in demand. However, there are others who say that once a smoker always a smoker, no matter the cost. Some of the facts to support the decrease show the highest change in youth smokers. For example, for every ten percent increase in the price of a pack of cigarettes, youth smoking rates overall drop about seven percent. Another shocking effect taxes had on cigarette consumption was in 1985 where the tax increase had more of an effect on the consumption than did the health scare created by the government in the 1960’s in Surgeon General’s reports.Although I was not able to find reliable sources to prove the demand to be inelastic, from what I have observed, initially people cut back or attempt to quit but the diehard smokers eventually give in and continue to pay the increased amount.
An increase in cigarette taxes can also have other effects, some being undesired. An example of an undesired effect would be smuggling. Smuggling began centuries ago in the 1300s where countries would smuggle wool from England. People smuggle to avoid the duties or tariffs placed on products when they cross borders, be them countries or states. In 2000, police had busted a smuggling ring in North Carolina. The group had been transporting cigarettes to Michigan because they had a 75 cent tax compared to the 5 cent tax in NC. It turned out the ring was run by someone with connections to Hezbollah and Al Qaeda. The money made from this ring, about $10,000each trip, went to the funding of terror networks. Another unintended consequence isthe counterfeiting of cigarettes themselves. The Chinese are now exporting counterfeit cigarettes that look identical to their real counterparts. In one port alone, customs officials reported a 10 fold increase just in 2001. Even Phillip Morris Executives couldn’t tell the difference between the real cigarettes and the counterfeits. This is especially dangerous because the counterfeit cigarettes most likely contain things they shouldn’t, such as sawdust.
The cigarette tax overall effects the lower class the most. A study done in 2007 showed that 29% of adults with incomes below the federal poverty level smoked. This is compared to the 20% of those at or above the poverty level.This shows that ultimately the people who can barely afford it to begin with, are the ones who are affected the most. This is likely the reason that when taxes increase, usage decrease. These users literally can’t afford it.
As stated above, another reason for increasing cigarette taxes is to increase state revenue. Studies have shown however, that this tends to backfire. The increased taxes usually lead to a decrease in revenue due to the decreased usage or the increase in smuggling. So what does this ultimately affect? What is the tax money used for? Well every state uses the tax revenue differently. In Michigan, they use the extra revenue for college scholarships; for state economic development programs; for a Forest Finance Authority; for promoting the film industry in Michigan; for advertising for Michigan's tourism industry; and for a lump sum payment of $400 million in securitized revenues in 2006. Surprisingly, in 2007 Michigan spent none of the revenues on tobacco prevention programs, but in 2008, Michigan reported $3.6 million was spent on such programs. This was only about 6.6 percent of the CDC’s recommended minimum.
Now how much of this money goes to pay for health care you may ask? Well, I was unable to find an amount; I was able to find states that had proposed a cigarette tax hike in order to fund a health care reform. It was reported that bills to raise tobacco taxes have been active in 33 state legislatures since 2009. It has become more popular to increase cigarette tax to fund the health care reform. This supports the idea that the increased cigarette taxes in 2009 was likely intended to fund Obama’s affordable health care act in 2010. Although there were no reliable sources to confirm this, it is most likely what happened.
All in all, I have found that increased cigarette taxes are most likely to decrease usage. I have also found that there can be adverse effects of raising the taxes such as smuggling and counterfeiting. It is also apparent that the taxes affect the poor more than the rich. Unfortunately, it appears the states do not use the money as they should, on smoking prevention programs, but instead try to fund health care reforms.

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