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Economic Research

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Volume 13, Number 2
Second Quarter 2011


Tax and Nicotine

In the wake of the 2007–9 recession, state governments in the Southeast and across the nation, facing large budget gaps, have scrambled to raise revenues without sacrificing political capital. Cigarette taxes have long been an attractive target, explains staff writer Ed English in "Tax and Nicotine," featured in the second-quarter issue of EconSouth.

Tax and NicotineHowever, as smoking-cessation initiatives and the higher cost of smoking diminishes the number of smokers, English questions the ongoing reliability of this particular vice tax as a source of revenue.

Each southeastern state has either considered or enacted a hike in the cigarette tax rate in recent years, including most recently a $1 per pack increase in Florida in 2010. Those that argue in favor of raising the cigarette tax often point to the economic costs smokers impose on the broader population, which according to the Centers for Disease Control and Prevention (CDC) amount to about $10.47 per pack of cigarettes sold in the United States.

Many supporters of higher cigarette tax rates argue that in addition to generating additional revenues, the hikes also discourage young people from smoking, English notes. Data from the CDC support their claims. The CDC estimates that cigarette consumption among adolescents and young adults decreases 4 percent for each 10 percent increase in price. Smoking rates and cigarette tax trends in the Southeast corroborate these findings: the states with the lowest cigarette tax rates have the highest annual per capita sales.

Additional factors affect per capital sales as well, says English, including stop-smoking campaigns and the tax rate in neighboring states. However, the effect of higher cigarette tax rates on government revenues is not clear cut. States that enact higher cigarette taxes generally see a short-term spike in revenues, followed by a gradual reduction. Trends such as these are affecting the way some lawmakers look at the issue—indeed, a few states are now considering a reduction in their cigarette taxes in the hopes of luring out-of-state smokers.

Read more about the effects of cigarette tax hikes on government budgets in the Southeast in the second-quarter issue of EconSouth, now available online.