NCPA - National Center for Policy Analysis

Tobacco Regulation And Taxes

August 2, 2000

Smoking rates have fallen in recent years, but economists question whether government restrictions on smoking and increased taxes on cigarettes are responsible. A new Fraser Institute study by economist Filip Palda suggests government actions have followed prevailing trends in society toward smoking.

  • For instance, by the end of the 19th century in the United States, 14 states had passed laws banning tobacco.
  • However, as smoking became popular in the early 20th century, most of these laws were either repealed or not enforced.
  • Smoking regulations intensified beginning in the 1970s, when smokers became a minority, and took full effect only in the 1980s, when smokers comprised just one-third of the population.

More recently, governments in the U.S. and Canada have attempted to recover the public health care costs of smoking. But studies have shown the taxes smokers pay have more than repaid government losses for smoking-related disability and health care. Thus lawsuits, like taxes, are aimed more at raising revenue than reducing smoking.

  • In 1978 smokers in Ontario cost government an estimated $21.5 to $39.1 million (Canadian dollars) but paid $485 million in taxes, or between 12.3 and 22.2 times what they cost the health care system.
  • In 1986 Canadian smokers paid an annual tax amounting to a $363 subsidy to each nonsmoker in the country.
  • Between 1985 and 1991, as smoking rates fell, governments in Canada managed to raise real revenues from tobacco taxes by 39.8 percent .

But after 1991, tax revenues fell despite increasing taxes per pack, as smokers decided to pay smugglers rather than the government.

Palda suggests smoking regulations and taxes go hand-in-hand because regulation helps to shame smokers into accepting tax increases.

Source: Filip Palda, "The History of Tobacco Regulation: Forward to the Past," Public Policy Sources No. 40, July 26, 2000, Fraser Institute, 4th Floor, 1770 Burrard Street, Vancouver, BC, Canada, V6J 3G7, (604) 688-0221.


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