Tobacco Tax

Today’s New York Times featured an article discussing the tendency for a number of states to raise tobacco taxes in order to make up for deficits in the budget, particularly with respect to financing health care reform and medical research. Interestingly, the tobacco companies, unhappy about the rising taxes, gave this argument in response:

The tobacco industry counters that smokers already bear an unfair tax burden and that increases encourage cross-border purchases and bootlegging. Cigarette manufacturers also argue that tobacco taxes make for an unstable revenue source because of declining sales. An analysis of recent tobacco tax increases conducted by Altria, the parent company of Philip Morris USA Inc., concluded that three-fourths of them had raised less money than projected.

The first argument is amusing at best. When did tobacco companies start caring about the well-being of their customers? I suppose they care about the financial well-being of their customers but not their health. As long as the tobacco companies can make a profit from tobacco sales, they will be happy; otherwise, they could simply lower tobacco product prices to compensate for the tax increases. Given their benevolence and concern for their customers, will tobacco companies do this? Not likely! The second argument is spurious. It is improbable for any analysis or study by a tobacco company to be scientifically sound and unbiased, but nonetheless, the conclusion is of interest. However, does it matter if the money raised is lower than expected? Tobacco taxes have been very successful in the past at raising some money for medical research in states such as Louisiana, but perhaps they shouldn’t be depended on as a sole method of covering deficits.

The many societal (e.g. anti-smoking laws) and financial (e.g. taxes) barriers to smoking seem to function well as preventive measures for starting the habit of smoking, and they similarly might help the medical profession set the stage for patients to quit smoking (since we now have more effective medications/patches and counseling methods). That is, people would rather quit or taper their smoking habits than pay the taxes (e.g. being “financially burdened” by the new taxes). People adjust. Tobacco companies might not. Even if the tobacco taxes do not raise as much money as expected, is there any harm done except to an industry that feeds off the anxiety and fatigue of its consumers (to the detriment of their health)? I say tax away.

  1. Ben said:

    Three things here.

    One: there was an interesting study done at some time which noted how alcohol and tobacco taxes could actually increase happiness. I’m at work right now so I don’t know where the study is, but just wanted to throw it out there.

    Two: this gets into the issue of whether or not the government has an obligation to be paternalistic. A libertarian would argue that the government has no business telling people how much risk they can take on in their lives — ergo a tax on the tobacco industry to curtail smoking on behalf of the smokers is illegitimate because it oversteps the government’s bounds.

    Three: However, smoking is unique for two reasons. The first is that it’s addictive (although how addictive depends on the smoker), so it can be argued that the government has an obligation of preventing this sort of addiction (although again, why doesn’t the government regulate anything that can be “addictive” — ie watching Scrubs — and don’t tell me that’s not addictive and bad for my health :-P). The second is that there is a social externality — that of secondhand smoke. The person who bought the cigarette may have calculated the balance between the risk to his health and the joy he gets out of smoking, but he almost certainly hasn’t calculated the increased risk of cancer that his neighbors, kids, friends now face. A tax to “force” the smoker to consider the social costs of their actions would then be legitimate by almost any economist’s standards (and is called a Pigovian tax).

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