Cigarette Taxes

A highly successful combination of two strong actors was realized by Edward Zwick in the 1994 Legends of the Fall and then once again in 1998 by Martin Brest in Meet Joe Black. The powerful duo was formed in both cases by Anthony Hopkins and Brad Pitt. In Meet Joe Black, Pitt played the incarnation of death who was preparing the character played by Hopkins for his final destination.

During a corporate meeting, one of Hopkins’ characters’ employees mentions that joining John Bontecou is every bit as certain as death and taxes. Pitt’s character finds the combination a rather odd pairing (Goldman, 1998). Nevertheless, it is extremely true — nobody can escape either death or taxes. But what about the items which bring death? Can they escape taxes? The answer is a clear NO, with cigarettes being the most relevant examples in this sense.

Facts and Figures

The taxes imposed on the cigarettes purchased differ from one state to the other. A global legislation relative to the issues has yet to be instated. Even within the United States of America, each state implements the quotas it sees fair. The federal cigarette tax is of $1.01 per pack of cigarettes, but each state is given the liberty to modify it as it sees fit; the medium tax across the U.S. is of $1.00 per pack of cigarettes. The three most expensive states for buying cigarettes are: New Jersey, with a tax of $2.57, Rhode Island with a tax per pack of $2.46 and Washington with a $2.02 tax per pack. The cheapest states from where to purchase cigarettes are: South Carolina with a $0.07 tax, Missouri with $0.17 and Mississippi with a tax per pack of $0.18 (Federation of Tax Administrators, 2008).

The same fluctuations are registered within the European Union as well, where each individual country implements its own fares on smoking. This generally leads to massive fluctuations in the retail prices — while in Ireland, a pack of 20 cigarettes sells for an estimated $9.89, the same pack can be purchased from Bulgaria for $1.68. The amount of taxes within the final retail price of the pack of cigarettes is generally between 70 and 90 per cent. Otherwise put, for the cigarettes sold in Ireland, the tax is of $7.76 and the tax for the cigarettes sold in Bulgaria is of $1.38 (Tobacco Manufacturers Association, 2008).

3. Global Tendency

Despite the determination of some countries to maintain the years’ low levels of cigarette taxes, fact remains that the global trend is that of increasing the taxes as a means of reducing the consumption of cigarettes. The endeavor is generally considered noble as it strives to safeguard the health of the individuals. Nevertheless, each individual should be free to make his own choices and decide himself what is best for him. And considering that the individual chooses to smoke, it might be seen as unethical how the state forces him to pay a highly inflated price.

As the morality of the cigarette taxes is not the subject of the hereby research however, one limits itself to the realization of the growing tendency in increasing the tax rates. Within the European Union for instance, legislations are being voted according to which the minimum rate of excise on cigarettes is to be subjected to a 50 per cent increase. This rate is currently situated at $100 per 1,000 cigarettes, namely $2 per pack of 20 cigarettes. With the new legislation however, it will increase to $134 per 1,000 cigarettes, namely $2.68 per pack. The global efforts to increasing the cigarette tax are promoted as efforts to reducing the number of smokers, but they also have the aim of reducing the international fluctuations in the retail prices of cigarettes (ProCor, 2008).

Another interesting element in the behavior of cigarette taxes is that they are regressive in nature. This basically means that “smoking rates increase as the income level of the group declines, so that the poor segment of the population tends to be hit particularly hard by cigarette taxes” (Cordes, Ebel and Gravelle, 2005, p.440).

4. Functions of the Cigarette Tax

The cigarette tax serves three primary functions:

reducing the consumption of cigarettes increasing the revenues to the state budgets, and creating a social sense of equity

This research will only deal with the second and third functions as these relate better to the concepts of micro and macroeconomics. In this order of ideas, as it has been previously mentioned, the national authorities promote health as the main generator of increased cigarette taxes. Yet, one must recognize that the federal authorities gain significant financial resources from imposing large fares on smoking. The money retrieved from taxes is then the central point of the economic function of taxing cigarettes. And the amount of the money collected is sufficiently high, even more so when the percentage of tax in the final retail prince is greater for cigarettes than it is for alcohol or utilities (Cordes, Ebel and Gravelle, p.440).

Policy makers often turn to cigarettes as a means of attracting more revenues to the state budget. And this necessity is extremely increased today, as the War on Terrorism commenced by the Bush administration brought about a record high federal debt. Nevertheless, an increase in the cigarette tax only looks good on paper. The past endeavors have shown that no major increases are obvious in the contributions to the state budgets as people either smoke less, either purchase their cigarettes from states which impose lower taxes (Williams, 2008, p.4).

Another function of the tax is of a social nature, and sees that when smoking, people generate an increased social cost. Otherwise put, people who smoke are more likely to contract illnesses — those directly related to smoking, but also other diseases which can impact non-smokers also, but to which smokers are more prominent due to their weakened immune system. This situation places an increased pressure on the health care system, which must serve the necessity of the ill smokers. The “medical care cost per pack [is] of $0.58, a sick leave cost per pack [is] of $0.01, a group life insurance cost per pack [is] of $0.14 and a cost per pack of fires [is] of $0.02″ (Cordes, Ebel and Gravelle, p.441). The cigarette tax then, through its inclusion in the retail price, serves the function of making the smoker pay the counter value of his future medical bills.

In some cases however, the smoker will not live enough to translate all the taxes paid into medical care. This basically translates into the fact that smoking may in fact generate a positive financial effect upon the society, as it leads to the premature death of the smokers, who for years contributed to the state budget, but who do not reach the retirement age to cost the state in pensions and other public services. “The offsetting savings were nursing home care cost savings of — $0.24 and retirement pension savings of — $1.26. On balance, then, cigarette smoking saves society — $0.32 per pack, even excluding the role of excise taxes” (Cordes, Ebel and Gravelle, p.441).

5. Questions for Further Research

Based on the research hereby conducted, two additional research questions could be raised:

(1) Given the fluctuating taxes implemented from one state to the other, can these be used to explain fluctuating trends in smoking habits?

(2) Can a net difference be identified between smoking habits in the United States and those in the European Union?

6. Conclusions

Nothing is surer than death and taxes! And this is true even for the products which could lead to the consumers’ untimely death, such as cigarettes. Sustained efforts are currently being made to enforce a region-wide legislation that increases the taxes imposed on cigarettes and consequently their retail price. Today, each country implements the quotas it finds most suitable, leading as such to major fluctuations in the taxes, their percentage in the price and the final retail price.

The federal authorities generally explain the high cigarette taxes as a means of reducing the consumption of cigarette, with the ultimate aim of reducing the number of smokers and protecting the health of the individuals. Nevertheless, fact remains that the fares carry a major economic function — that of gathering money for the state budget. This positive effect on the federal budget has however yet to be observed, as history has shown us that increased taxes reduce demand, rather than create additional income. The situation with the promoted social impact is also blurred, as I believe is the entire debate over smoking and its economic and social implications.

References:

Cordes, J.J., Ebel, R.D., Gravelle, 2005, Encyclopedia of Taxation and Tax Policy, 2nd Edition, The Urban Institute

Goldman, B., 1998, Meet Joe Black Screenplay, Internet Movie Database, http://www.imsdb.com/scripts/Meet-Joe-Black.htmlGravelle last accessed on November 18, 2009

Williams, J., September 17, 2008, Sibelius’ Cigarette Tax Proposal Ignores Economic Realities, The Kansas City Kansas, http://www.nocigtax.com/upload/file/16/20080917-kansascitykansan-editorial.pdf last accessed on November 18, 2009

2008, EU Cigarettes Price and Tax Breakdown — July 2008, Tobacco Manufacturers’ Association, http://www.the-tma.org.uk/page.aspx?page_id=35 last accessed on November 18, 2009

2008, Europe: Cigarette Tax Increase, ProCor, http://www.procor.org/prevention/prevention_show.htm?doc_id=696694 last accessed on November 18, 2009

2008, State Excise Tax Rates on Cigarettes, Federation of Tax Administrators, http://www.taxadmin.org/fta/rate/cigarett.html last accessed on November 18, 2009