NCPA - National Center for Policy Analysis


June 14, 2005

Raising the cigarette tax rate causes a great deal of harm, both to taxpayers and to the state governments who use them most, says the Tax Foundation. But because of the greater mobility of people and goods, along with instant communication, excise taxes are obsolete. This is especially true of the cigarette tax because the product is lightweight, compact and highly taxed, the product is easily smuggled.

Cigarette excise taxes only function as a predictable, untroublesome tax at a low tax rate. States that have raised their cigarette tax to the point that it is 50 cents per pack higher than a readily available, alternative source, are discovering a host of problems:

  • Revenue estimates are rarely met, causing budget problems.
  • In a replay of Prohibition-era social decay, law-abiding citizens learn to break the law routinely, and states respond by adopting intrusive and sometimes abusive tactics to catch them.
  • Organized criminals and terrorist cells begin trafficking in smuggled cigarettes, and the states spend prodigiously to catch them, with almost no success.
  • Businesses and jobs, along with their tax revenue on income, sales and property, are lost to interstate competition.

Tobacco taxation is a severe form of tax discrimination whose victims reside primarily among the working classes and not professional people. It is tax discrimination against people of modest means for the benefit of the well-to-do, says the Foundation.

The inaccuracy of revenue estimates for tobacco tax hikes obviously creates difficulties for state fiscal planning. That inaccuracy, moreover, will surely grow as the tax rates climb, and the rate of taxed sales is further and further divorced from the rate of tobacco consumption, says the Foundation.

Source: Richard E. Wagner, "State Excise Taxation: Horse-and-Buggy Taxes In an Electronic Age," Tax Foundation, Background Paper No. 48, May 31, 2005.

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