Cigarette Tax

The interest of the ongoing debate of cigarette tax, or "sin taxes" and its effect on US economics, to an independent researcher is both fascinating and potentially vexing.  These contrary reactions to the economic polemic are both primarily due to the interest behind the various research findings.  Like so many contentious subjects, it is impossible not to research this subject without being impeded by the lack of objectivity that is to be found across the board.  While it should not be surprising to observe the impact that interests and funding inextricably have on the results of research conducted, what is somewhat striking is the failure of so many economists to at least present their findings under the guise of objectivity--the mind boggling amount of biased and ostensibly myopic research to be found, in addition to the potential economic ramifications of further tax increase, is what makes this scavenger hunt for objectivity in this realm of competing interests such an interesting and exhausting endeavor.  Fortunately, one's conclusion needs not be as tenuous as those reached by economists in past years thanks to the data available to us as a product of recent tobacco taxation in states across the US.  Ultimately, the data, in tandem with recent models, suggest that in addition to a decrease in tobacco consumption and concurrent increase in budget-balancing revenue, increased taxation would yield the most predominant economic benefit through a decrease in healthcare costs.

Though, in the past, there have been those that argue that tobacco, being an addictive consumption, is an exception to the downward sloping demand curve (e.g., Elster, 1979; Winston, 1980; Thaler, 1981), it has been clearly established that tobacco demand does indeed react to price/tax fluctuation (Surgeon General Report: "Reducing Tobacco," 2012).  Professor Frank Chaloupka of the University of Illinois writes, "Well over 100 studies...clearly demonstrate that tobacco excise taxes are a powerful tool for reducing tobacco use while at the same time providing a reliable source of government revenues" (Chaloupka et al, 2012).  John Seffrin, chief executive of the American Cancer society, reported that the society has "irrefutable evidence that raising the tobacco tax lowers smoking rates among adults, lessens tobacco health ills, and deters millions of children from picking up their first cigarette" (Reuters, 2010).  Such findings are supported by the Centers for Disease Control and Prevention's 2011 survey that since President Obama's 2009 cigarette tax hike, the number of smokers dropped by 3 million, pushing tobacco use down to 18.9% of the population--the lowest percentage on record.

Of course, the sensationalistic focus on the drop-in smoking rates, on part of the media and other advocacy groups, does nothing to assist the examination of the less obvious economic repercussions of such a tax hike.  While, to be sure, the federal revenue gained was publicized, the impact on low-income families was not discussed nearly as much; more than half of smokers earn less than $36,000/yr. (with only 13% earning $ 90k<)  and, as it is a consumption-based tax, there is no accounting for the income of the consumer (Saad, 2009).  This is problematic for the lower class, especially because the issue of self-control has yet to be adequately analyzed from a behavioral economic standpoint when considering ideal tax levels.  Yet, research is increasingly showing that increased taxation will assist in putting the rational back in 'rational users':  the immediate gratification of tobacco use is offset by the immediate cost of the product (Cherukpalli, 2010 pp. 609-615).

Before considering the economic effects further increase in taxation would have, let us first consider the macroeconomic ramifications of previous tax-increase.  Firstly, according to a USA Today analysis, approximately 1 million adults on Medicaid quit smoking; this has vast economic potential.  A report by the US Department of Health and Human Services (HHS) stated that, "Smoking-related illness in the United States costs $96 billion each year in medical costs and $97 billion in lost productivity due to premature mortality" (HHS, 2012).  What's more, the Bureau of Economic Analysis published findings revealing that despite an 11% drop in tobacco purchases, consumer spending rose from $80 billion in 2008 to $98 billion in 2011 (inflation accounted for; Cauchon, 2012).  It is ergo a given that increased tobacco taxation has substantial macroeconomic benefit, irrespective of the microeconomic cost to those who choose to continue smoking.

Having noted the economic benefits of such tax-increase, President Obama proposed in his 2014 fiscal budget, that an additional 94-cent increase in cigarette tax be lumped on to his initial 62-cent increase in 2009.  The arguments against increased taxation largely remain the same.  Bryan Hatchell, a spokesman for Reynolds American, a Fortune 500 cigarette maker is recorded as saying, "The idea of increasing taxes on low-to-middle-income Americans at this time is ludicrous" (Hargreaves, 2013).  But despite reservations from smokers and cigarette advocates alike, the argument from the perspective of the oppressed lower class bears little weight in an economic case, particularly when there is a direct correlation between smoking cessation (or at least attenuation) and tax hikes.  Further, the very perspective the argument rests on denies its validity as medical costs, in most cases, far outweigh that of the tax-increase, regardless of use-frequency.

Another argument against increased tax measures is that tobacco sales are vital to the nation's economy.  Claims such as this are convincing because it is true that the tobacco industry plays a significant role in the economy.   Indeed, 33 million people are involved in tobacco farming (World Bank, 1999), half that number work in product manufacturing, distribution, and retailing, another 10 million tobacco outfitting (e.g., shipping, cigarette papers, etc.; Warner, 2000), and, of course, tax-revenue gained from tobacco sales is dependent on the continued existence of the industry.  While these numbers are, at first glance, convincing, the reality is that in 2000, almost half of US tobacco could claim no more than 1% of their income from tobacco farming; and in fact, most tobacco farmers hold full time jobs elsewhere (Gale, 1997).  As far as the tax revenue dependent on tobacco sales, such revenue is largely dedicated to preventive and maintenance measures, such as tobacco-danger awareness programs and cancer research; need more be spoken in this vein?  One final myth-deteriorating datum included here is the 2000 report by the US Department of Agriculture concluded that "loss of tobacco income and jobs [would] have little noticeable long-term effect on the U.S. economy as a whole..." (Gale, 2000).

The limits of this paper prevent a thorough analysis of the debate, allowing only a report that grazes the surface of the various and economically nuanced cases to be analyzed, but a recapitulation of the above is most tersely accomplished by stating that the economic benefits of increased cigarette taxation far outweigh the costs.  The arguments against further tax hikes are mostly, if a pun may be granted, smoke-blowing attempts to preserve interests.  The economic pros of past taxation (increased tax-revenue, decline in tobacco purchase with concurrent increase in tobacco sales revenue, as well as potential for hundreds of billions of dollars saved from medical expenses and increased productivity) have been weighed against the cons (the imbalance of tax in disservice of the poor) in order to establish the pros and cons of future tax-increase, with the extreme ends of both pros and cons meeting in the middle: the end of the tobacco industry; the negative byproduct of this being a harsh transition for those workers completely dependent on the tobacco industry, and the positive ones simply being the aforementioned pros with amplified potential.  

References

Cauchon, D. (2012, September 11). Big tax increase reduces smoking. USA Today. Retrieved June 10, 2013, from http://usatoday30.usatoday.com/NEWS/usaedition/2012-09-11-cigarette-tax_ST_ U.htm

Centers for Disease Control and Prevention. (2011). Vital signs: Current cigarette smoking among adults aged >/=18 years—United States, 2005–2010. MMWR: Morbidity and Mortality Weekly Report, 60(35), 1207-1212. 

Chaloupka, F. J., Cummings, K. M., Morley, C., & Horan, J. (2012). Tax, Price and Cigarette Smoking: Evidence from The Tobacco Documents and Implications for Tobacco Company Marketing Strategies. Tobacco Control, 21(2), 172-180. Retrieved June 10, 2013, from http://tobaccocontrol.bmj.com/content/21/2/172.short

Cherukupalli, R. (2010). A Behavioral Economics Perspective on Tobacco Taxation. American Journal of Public Health, 100(4), 609-615. Retrieved June 10, 2013, from the US National Library of Medicine National Institutes of Health database.

Elster, J. (1979). Ulysses and the Sirens: studies in rationality and irrationality. Cambridge [Eng.: Cambridge University Press.

Gale, F., & Capehart, T. (n.d.). Agricultural Economic Report No. (AER-789) 44 pp. USDA ERS - Home. Retrieved June 10, 2013, from http://ers.usda.gov

Reuters. (2010, February 11). Can a Cigarrette Tax Help save the Economy? Health Advocates See $9B Revenue for $1-per-pack Tax. Retrieved from http://www.nydailynews.com. 

Saad, L. (2009, April 1). Cigarette Tax Will Affect Low-Income Americans Most. Gallup. Retrieved June 10, 2013, from http://gallup.com

Thaler, R. H., & Shefrin, H. M. (1981). An Economic Theory of Self-Control. Journal of Political Economy, 89(2), 392-406. Retrieved June 10, 2013, from http://jstor.org/discover/10.2307/1833317?uid=3739560&uid=2&uid=4&uid=373 9256&sid=21102300304071

U.S. Department of Health and Human Services. Preventing Tobacco Use Among Youth and Young Adults: A Report of the Surgeon General. Atlanta, GA: U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health, 2012.

Winston, G. C. (1980). Addiction and Backsliding: A Theory of Compulsive Consumption. Journal of Economic Behavior & Organization, 1(4), 295-324. Retrieved June 10, 2013, from http://dx.doi.org/10.1016/0167-2681(80)90009-8

World Bank. (1999). Curbing the Epidemic: Governments and The Economics of Tobacco Control. Tobacco Control, 8(2), 196-201.