NCPA - National Center for Policy Analysis

Suffering Tobacco's Tax

August 7, 2002

Like many states, Pennsylvania is considering raising taxes on cigarettes to plug a growing deficit. However, a new report by the Commonwealth Foundation for Public Policy Alternatives argues that these taxes will hurt workers and the poor.

Currently, policymakers are considering a tax increase from $0.31 per pack to $1.00 per pack in an effort to raise revenue and deter teenage smoking. However, this tax increase would affect the commonwealth's economy. The report estimates that:

  • A $0.69 tax increase would lead to taxable cigarette sales losses in Pennsylvania of 29.76 percent or over 317 million packs.
  • The tax would cost 26 percent of workers in the tobacco industry their jobs -- about 3,060.
  • Tobacco industry suppliers, like truckers and financiers, risk the loss of 1,700 jobs and $40 million in compensation.

Not only will the tax hurt the economy, but it is not a good source of revenue -- it is both regressive and unstable. The report finds that:

  • The tax burden of cigarettes is 39 times as great for the bottom 20 percent of people in the U.S. than on the top 1 percent of income earners.
  • Cigarette taxes are generating less revenue: each penny of the federal excise tax raised $311 million in 1981, but only $208 million in 2001.

Finally, the report argues that cigarette taxes will not prevent youth smoking. According to a recent study by economists at Cornell University, taxes reduced the quantity of cigarettes consumed, not whether teenagers chose to smoke. State by state comparisons bear this out: Michigan has high cigarette tax rates and high youth smoking, while Alabama has low taxes and a relatively low incidence of youth smoking.

Source: John Dunham, "Taxing Smokers: Will Cigarette Taxes Solve Pennsylvania's Budget Crisis and Reduce Teen Smoking?" Commonwealth Policy Brief Vol. 2002, No. 6, June 2002, Commonwealth Foundation for Public Policy Alternatives.

 

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