While some may see increased taxes as a form of gouging by the government, it is helpful to understand that there are some negative externalities that are passed on to nonsmokers. The total economic costs associated with cigarette smoking are estimated at $7.18 per pack (vs. average cost of $4.26 per pack) of cigarettes sold in the United States (Centers for Disease Control and Prevention). It would be responsible for the government to use tax revenues to offset some of this difference in economic cost and retail cost of cigarettes. Any policy that helps decrease smoking should aid in decreasing the overall burden of these externalities.
From 1990 to 2004 there was a steady decline in cigarette production, consumption and export from the United States (see figure 4). During that 15-year period, cigarette production decreased by about 31%, exports decreased by about 28%, and consumption dropped by about 26% (Tobacco Outlook, 2007). These decreases affect employment in many sectors. The United States Department of Agriculture estimates that a $1 increase in cigarette excise taxes could affect an estimated 74,700 to 96,800 jobs. This involves workers involved directly in the supply chain: growers, manufacturers, distributors, storage, and sales; it also includes support industry personnel. A breakdown of jobs within each segment are as follows : 5,000 jobs in manufacturing, 9,700-12,800 jobs in manufacturing support industries (paper, chemicals, machinery, ect), 11,600-16,100 farming jobs, 34,300-43,400 jobs in wholesale/retail, and 10,000 jobs in financial, personnel, and service industries (Gale et al. 2000). Demand should expand in other sectors as consumers shift spending away from tobacco products to other goods and services or tax payments (increased government spending) (Gale et al. 2000).
While this shift should be gradual given the current rate of decline, some areas of the industry will be hit harder than others. Some of the hardest hit areas include those in cigarette manufacturing. This is because cigarette manufacturing employees make more than the national average for workers in manufacturing ($24.34 vs. $13.49). This would account for a $434 million per year loss to those employees forced to find other manufacturing employment (Gale et al. 2000). On the other hand though, retailers and wholesalers of tobacco generally pay less than the national average for their employees. Some regions in the US will also have a tougher time if there is little substitute employment in the area. Also, with reductions in cigarette sales we should experience some decreases in the cost from negative externalities that would compensate for the overall decreases in the tobacco industry (. If the pricing and tax structures are implemented correctly, then we should see a slow steady decrease over time (www.cdc.gov). This will allow the economy of the United States to adjust to fill the voids vacated by cigarettes.
Based on an inelastic price of demand tax increases on cigarettes should only moderately lower consumption. Tax revenues should be large and predictable, and, if tax policy is implemented responsibly with tobacco education, the decreases in employment and the tobacco industry should be moderate enough for the economy to absorb the changes without causing any major economic hardship overall. There will be hardship for cigarette manufacturers and small economies in production and manufacturing areas in the short run. In the long run, those people will be able to relocate or retrain. Also in the long run the negative externalities caused by health problems and reduced work days and lifespan should be reduced.
Figure 1
Price elasticity of demand for cigarettes in the United States, 1971-2001.
(Chan and Capehart 2004).
Figure 2
Federal and state per-pack cigarette tax rate (Chan and Capehart 2004).
Figure 3
Projected New Federal Revenue from Cigarette Tax Rate Increases (Billions of Dollars)
Projected federal tax revenues if tax rates remain constant at 89 cents per pack at the current rate of decrease in consumption per year (adapted fromLindblom 2007).
Figure 4
Cigarette Production, Exports, and Domestic Consumption—United States, 1990–2004
This line graph shows trends in cigarette production, consumption and export for the United States. ( from )
References
Chan, K and Capehart, J. (Q1 2004). Health Concerns or price, Which takes credit for declining cigarette consumption in the US? Choices Magazine. Q1 2004 available (Referenced December 12, 2007)
Gale, F. Foreman, L. and Capehart, T. (2000). Tobacco and the Economy: Farms, Jobs, and Communities Economic Research Service, U.S. Department of Agriculture, Agricultural Economic Report No. 789. available (Referenced December 12, 2007).
Lindblom, E (2007) Campaign for Tobacco-Free Kids, July 1, 2007 available (Referenced December 12, 2007).
Sahadi, J. (July 14, 2005). Do cigarette taxes really work? Study: when the tax on cigarettes reaches excessively high levels, it becomes counterproductive. (Referenced December 12, 2007)
Centers for Disease Control and Prevention. . Morbidity and Mortality Weekly Report [serial online]. 2002;51:300–303. available http://www.cdc.gov/mmwr/preview/mmwrhtml/mm5114a2.htm. (Referenced December 12, 2007).
(Referenced December 12, 2007).
United States Department of Agriculture Economic Research Service. (2003). Tobacco outlook report. Washington, DC
Tobacco Outlook, 2007 available () (Referenced December 12, 2007).