Cigarette Tax: The Unintended Consequences

Cigarette Tax: The Unintended Consequences
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Since the turn of the century, one can scarcely read a newspaper without being apprised of some municipal or state governing body or official contemplating a tax hike on cigarettes. It really is the tax du jour, and it's evident why.

Smokers make up less than 20% of the population, so they're easy to target. In addition, smoking detrimentally affects the health of smokers and nonsmokers alike. Moreover, quite simply, sin taxes on cigarettes work. They accomplish their intended goal of lowering smoking rates.

Numerous studies have demonstrated fairly conclusively that increases in cigarette taxes reduce smoking behavior, especially among youth, young adults, and persons of low socioeconomic status. The World Bank estimates that, on average, a price increase of 10% on a pack of cigarettes reduces demand by about 4% among adults in high-income countries. An overall reduction in smoking lessens the prevalence of dangerous secondhand smoke, diminishes the rates of lung cancer and cardiovascular disease, minimizes pollution, and lowers healthcare costs per capita.

But like any sweeping government policy, there are always unintended consequences. When faced with sin taxes on cigarettes, people may knowingly or unknowingly choose to "sin" elsewhere.

The Government Accountability Office recently reported that in the wake of increased federal taxes on cigarettes in 2009, many smokers have simply shifted to pipe tobacco and large cigars, which are both taxed at lower rates. Between January 2009 and September 2011, monthly sales of pipe tobacco skyrocketed from 240,000 pounds to over 3 million pounds, a 1150% increase. Over the same time interval, monthly sales of large cigars more than doubled from 411 million pounds to over 1 billion pounds.

Besides resulting in a shift in purchasing choices, cigarette sin taxes also indirectly result in illegal activities like smuggling. Each of the fifty U.S. states taxes cigarettes at different levels, and this uneven price distribution opens up market avenues for nefarious wrongdoers. Cigarette trafficking does not appear to be extremely prevalent within the U.S., but it's estimated to be a $1.5 billion industry in Canada. Traffickers commonly smuggle cheap cigarettes purchased in the United States across the border. It's one of the few illegal drug trades where the U.S. is an exporter, not an importer.

Interestingly as well, a recent study just published in the journal Substance Abuse Treatment, Prevention, and Policy reported that boosts in state cigarette prices were associated with increases in binge drinking among persons aged 21-29, specifically a 4.06% increase for every dollar increase in cigarette price. Drinking also rose among those aged 65 and older.

Not all age demographics showed the same pattern, but it appears quite possible that, for some people, alcohol is a substitute for smoking.

One thing, however, is certain: The precise effects of any policy, especially as they pertain to human behavior, are difficult to measure and even harder to foresee. There's a reason economists call it the "law" of unintended consequences.

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