NCPA - National Center for Policy Analysis

Impact Of Cigarette Taxes

March 8, 1999

State which have raised their taxes on cigarettes note that sales decline somewhat. But Salomon Smith Barney tobacco analyst Martin Feldman notes that while legal volumes fall, the number of people who smoke doesn't change much. "Either they smoke less or trade down to cheaper cigarettes," he comments.

One study by researchers at Cornell University suggests that teens aren't as concerned as adults about an increase in cigarette prices.

  • A 20-cent-a-pack tax hike would reduce the number of teen smokers by less than half a percentage point.
  • Raising the taxes by $1.50 cuts teen smoking by about 2 percentage points -- far less than the 40 percent to 50 percent decline envisioned by politicians.
  • Experts warn that raising prices to $2 a pack would have the unintended consequence of creating a black market.

Americans who live in states with high cigarette taxes already cross state lines to purchase them in state with low taxes, studies have shown.

  • When Michigan raised its cigarette tax by 50 cents a pack in 1994, its taxable sales fell by 21 percent, according to the Tax Foundation.
  • But at the same time sales in nearby low-tax states rose 8.5 percent -- reversing several years of decline.
  • When Canada and its provinces raised taxes by as much as $3 Canadian a pack in the late 1980s, there was a big increase in smuggling from the U.S. -- with contraband cigarettes making up as much as 60 percent of the market in Quebec.

Canada's provinces wound up cutting the taxes.

Source: Anna Bray Duff, "Victory in the War on Tobacco?" Investor's Business Daily, March 8, 1999.

 

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