How Cigarette Taxes Affect the Economy

Though cigarettes and tobacco have enjoyed a rich history in the United States, the past few
decades have seen the chipping away of their former status due to the influx of studies that have
conclusively proven their negative health consequences. This has made cigarettes a particularly
easy target for any number of attacks, including smoking bans and ad campaigns by anti-tobacco

And as state governments continue to struggle with the economic recession, cigarette
taxes have become an increasingly attractive prospect for bringing in additional revenue while
punishing those who have clung to the dirty habit. States around the country have imposed
staggering tax hikes on these stigmatized products, often citing the mutual benefits of bringing
in extra money to use for additional civil projects and the added bonus of taxing smokers out of
their habit.

However, cigarette taxes still remain controversial and aren’t supported by all. So to explore this
issue more in depth, here is an overview of how the cigarette tax affects the economy, and who
ends up paying the price.

Tax Incentives

Cigarettes have recently found themselves attacked with taxes from all sides. In 2009, the Obama
administration signed the Children’s Health Insurance Program Reauthorization Act which raised
the federal per-pack tax of cigarettes from $0.39 cents to $1.01. But this tax hike was just the
beginning as a number of states quickly followed suit. The same year, Utah raised the cigarette
tax by $1 while New Mexico raised theirs by 75 cents. Most famously, New York raised their
cigarette tax rate to the highest in the country when it passed legislation in 2010 that brought the
tax rate to $9.20 per pack. At a time when the words like “tax hike” comes loaded with political
connotations that can get a politician thrown out of office, cigarette taxes have had relative ease
in sliding by uncontested.

But one of the reasons politicians have been unanimously pushing for these taxes is because
they have become huge cash cows for local governments – without all of the political backlash
associated with other taxes. In the state of Texas alone, cigarette taxes brought in an additional
$1.5 billion dollars. As a whole, the United States generated over $17 billion dollars from such

Tax Therapy

Though taxes have a stigma almost as bad as cigarettes themselves, states have proven much
more likely to target tobacco than any other source of tax when looking to plug budget deficits.
Whereas business and income taxes can have significant consequences on the economy, cigarette
taxes have actually proven to both raise revenue and reduce smoking.

According to research conducted by the Columbia University Mailman School of Public Health,
results taken from 14 different focus groups showed that respondents were much more interested
in quitting smoking following a smoking ban. The reduction in smoking following a tax hike
is also particularly prevalent among young or teenage smokers, making the results all the more

Smoke Screens

However, despite the obvious upside of tax hikes, there are also a number of consequences – the
most troubling being the increase in black market cigarettes following tax increases. This was a

result cited by the same study mentioned above, in addition to a number of others that have come
out in recent years, including one by the University of Denver School of International Studies
and another by the Office of Smoking and Health conducted in 1998. The trend towards black
market cigarettes is most pronounced in low-income neighborhoods, where tax hikes might put
cigarettes out of the reach of smokers. This is in stark contrast to middle-class smokers who
generally showed little sign of changing habits following a tax increase.

The bottom line is that while the benefits of a tax increase can outweigh the consequences of
black market buying, measures need to be put into place to ensure that cigarette taxes don’t end
up forcing low-income smokers to the black market – and many states have learned this lesson.
For instance, New York set up its own smokers’ “Quitline” to help people kick the habit. It offers
counseling, a community and even free nicotine patch starter kits – and if this is what more states
do with their cigarette tax money, these taxes start to look a lot more appealing.

Kent Yuen is a writer for JW Surety Bonds, a surety company that is proud to sponsor a series of financial
consumer education articles that help buyers make the right decisions.