A New View on Tobacco Taxation

Economic viewpoints on tobacco taxation typically seek to correct for the externailities imposed upon citizens by tobacco smokers. This new analysis seeks to account for these externalities, plus those incurred by family members of smokers, and assumes that smokers do not accurately value their future health.

Previous exonomic studies have deduced that taxes which increase the price of cigarrettes by 10 percent ultimately reduce consmption by 1 to 3 percent. Besides generating revenue for local, state, and federal governments, tobacco taxes serve as disincentives to smoke and urge current smokers to quit. The economic theory behind such taxes is that they are designed to correct for the costs inflicted on society caused by smokers. According to economic theory, any personal harm incurred by a smoker upon himself or herself is a private decision which should not face tax implications.

Today, most smokers realize that their habit is unhealthy and poses potential future health problems. However, the decision to smoke a cigarrette is cotingent on the current benefit of smoking outweighing the foreseen costs of smoking-related disease. This principle is apparent in an analogy shared by almost all American consumers: using credit cards values cash (purchasing power) now versus a discounted amount of cash in the future (an amount reduced by interest payments). For smokers, the experience of a cigarette now exceeds the value of health costs in the future. The current author feels that smokers tend to discount the cost of smoking much more steeply in the near future compared to the distant future; this so-called hyperbolic discounting is likely a result of the addictive nature of nicotine.

Empirical evidence imforms that smokers tend to have a skewed perception of the value of health costs in the near future. This implied a tendency towards impatience in the near term. Another study which required smokers who were attempting to quit to deposit money into a bank account in stead of spending it on cigarrettes demonstrated a 38 percent increased quit rate compared to a similarly situated control group.

Faced with such data, the author of this study suggests that tobacco taxes ought to account for some of the private costs of smoking (internalities) and not merely the externalities associated with smoking. While some economists may view this a readical viewpoint, at a minimum most could agree that tobacoo taxes should offet externalities incurred to society.

Based on present assumptions, the cost to society (including medical costs, sick leave, and life insurance costs) over the life of a 24-year old smoker averages out to $2.20 per pack. Expanding these externalities to household members yeilds an additional $5.44.

Data obtained from www.tobaccofreekids.org shows that the average tax rate on a pack of tobacco is only $1.34; this value fails to correct for the externalities on society and does not begin to account for externalities incurred on household members of smokers.

© Campaign for Tobacco Free Kids

Commentary

Tobacco cultivation dates back to pre-Columbian America were it was used ceremonially and sometimes as a trade item. Upon arrival of Europeans in America, tobacco became highly popularized and was a major cash crop of the Americas until the supremacy of cotton supplanted it.

In the modern world, the evils of tobacco as a contibutor to cancer, pulmonary, and cardiac disease has led to significant regulation and taxation. However, tax rates vary dramatically across the United States.

This current economic evaluation of tobacco taxes suggests that at a minimum – taxes (federal plus state and local) ought to add up to at least $2.20 per pack. It is conceivable, based on the eivdence presented, that tobacco taxes could be raised to a maximum of $7.64 per pack to account for externalities incurred upon household members and general society by smokers. While an outright ban on tobacco would seem unconsitiutional, lawmakers should continue to financially penalize those who smoke in order to recoup costs to society in lost productivity and death benefits.

AJPH. 2010; 100: 609-615.

by
Cedric K. Dark, MD, MPH