The economic benefits of higher cigarette taxes
Aaron M. Petryniec
Embry-Riddle Aeronautical University
Abstract
Today’s generation is more informed about the harmful effects of cigarettes than any generation before them. American tax money is also now paying for this disregard to human health. Billions of dollars are spent each year in tobacco related illnesses. By increasing the tax on all cigarettes and tobacco related products, states and the Federal government can increase revenue to help offset this toll in medical expenses while at the same time reducing the number of smokers. This increased revenue can also be used to balance budgets and have a positive effect on Gross Domestic Product.
The economic benefits of higher cigarette taxes
Tobacco use is the nation's number one cause of preventable death, killing more than 400,000 people and costing $96 billion in health care bills each year (“Federal and State,” 2009). The Federal government and individual states have found a very successful avenue to reduce these statistics. Since 2002, 47 states, DC, and several U.S. territories have increased their cigarette tax rates more than 105 times (“State Cigarette Excise Tax, 2012”). In 2009, President Obama signed into law a 62 percent Federal tobacco tax hike, increasing the federal tax from 39 cents to $1.01 per pack of cigarettes (Phillips, 2012). Refer to Diagram 1 to illustrate tax increases from 2201-2012. There are two main objectives for the cigarette tax increases. The first objective is to reduce the number of smokers which will ultimately benefit the economy in terms of healthcare related expenses and overall public health. The second objective is to generate revenue for the federal government and the states. The economic benefit of this increased sin tax is a win-win, but not all states have followed suit. The tax rate for each state varies significantly; however, every state as well as the federal government can use this tax as a tool to raise revenue, reduce healthcare costs attributed to smoking, as well as improve the health of the nation.
The first objective of increased cigarette taxes, to reduce the number of smokers, has already been realized and the number is still declining. The federal tax hike helped push tobacco use down to 18.9% in 2011, the lowest level on record. The core focus is on preventing new smokers by making cigarettes unaffordable to youth. Decline can also be seen in current smokers. About 1 million adults on Medicaid quit smoking, which could reduce future health costs (Cauchon, 2012). Currently, about one-quarter of federal spending goes toward Medicare, Medicaid, and various smaller mandatory health care programs. (“Raising the Excise Tax,” 2012). Reducing the number of smokers for health benefits of the nation is a social agenda and shows how much control government can exercise over individual liberties and personal choices. “A tobacco tax can be seen as a type of user’s fee…where the burden generated by the use of the product is more significantly offset by increased revenues” (“Three Reasons,” 2012, para. 4).
Many states have already seen the revenue benefits of this increased tax. States need money and taxpayers do not want to pay more taxes. Fewer than one-quarter of Americans smoke, therefore it stands to reason that citizens would rather increase cigarette taxes than see an increase in other taxes or reduced spending on programs (Hough, 2010). New York is currently the state with the highest tax at $4.35 per pack. Maryland is currently the 11th highest in the country at $2.00 per pack and is pushing for a $1 increase making it the 6th highest. “Three tax increases (in Maryland) on cigarettes since 1998 have brought the states revenue from cigarette taxes to nearly $400 million per year and have coincided with a 32 percent drop in adult smoking rates” (Hamblin, 2012, para. 6). The
