Why do most cigarette smokers tolerate massive state tax increases?

Commentary about business and finance.
Sept. 8 2010 2:03 PM

Cough It Up

Why do most cigarette smokers tolerate massive state tax increases?

Smoker. Click image to expand.
Smokers are unlikely to quit smoking or otherwise evade cigarette taxes

State governments don't get a lot of fiscal good news these days, so it was surprising this week when the state of Connecticut announced that a recent $1-a-pack tax increase on cigarettes raised $5 million more than the state had projected. As economists would predict, the daunting total of a $3-a-pack tax in Connecticut—the fourth highest burden in the country—did reduce the sale of cigarettes. Some smokers reacted to the tax by quitting, with others finding different ways around the tax.

But the surprising fact is that not that many quit smoking or evaded the tax—not enough, anyway, to cause the state to collect less in cigarette taxes than it would have without the hike. This experience is not unique to Connecticut. Over the last decade or so, several states and jurisdictions have experimented with massive cigarette tax increases, as much as 100 percent or more over the existing rate. California, for example, still has a relatively low state cigarette tax, but in January 1999, it ballooned from 37 cents a pack to 87 cents. In 2002, New York City raised the tax on a pack of cigarettes from 8 cents to $1.50, an astronomical hike of nearly 1,800 percent.

Yet according to anti-tobacco activists—who are backed up by economic studies—in every single instance, these huge tax hikes have led to states collecting more revenue, even as many smokers swear they won't pay them. Cigarettes may not quite be what economists call "perfectly price inelastic," but millions of American smokers are willing to pay much higher taxes than economic theory would suggest they should.

Advertisement

At the heart of nearly every tax debate in America is some version of the Laffer curve, a fancy way of describing a point of diminishing returns. An income tax of 0 percent produces no revenue; an income tax of 100 percent, it is presumed, causes people to change their behavior so as to avoid the tax, also producing nothing. Some ideal point in between will yield the maximum possible revenue.

In the late 1970s and the 1980s, this very old idea was applied to income tax and burst into prominence as part of the supply-side economics revolution. And since that time, many public officials have espoused the idea that cutting taxes will increase economic activity—and therefore create higher revenues—while raising taxes will have the opposite effect.

Cigarette taxes don't seem to behave this way (or, at a minimum, we've yet to hit the point at which even huge tax hikes lead to lower revenues). Indeed, in many states, the very notion of tax representing a portion of the underlying cost of a pack of cigarettes—the way that, say, a tip represents a portion of the cost of a restaurant meal—has ceased to have much meaning. When you're paying, as New York City smokers now do, $12 for a pack of Marlboros, nearly all of that is tax; the product is, economically, an afterthought.

To hear some economists and cigarette-tax foes tell it, this situation should never have come about. They have long argued that higher taxes would encourage more and more people to find ways to evade or break the law. This could be as simple as driving to a place where the taxes are lower. A smoker living in eastern Washington state, where the state tax is well above the national average at $3.025 per pack, could save a lot of money by crossing the border into Idaho, where tax is well below the national average at 57 cents per pack. And thanks to the mega-increases in cigarette taxes in recent years, the average tax difference between neighboring states is more than three times higher than it was in the early 1980s.

TODAY IN SLATE

Politics

The Democrats’ War at Home

How can the president’s party defend itself from the president’s foreign policy blunders?

The Religious Right Is Not Happy With Republicans  

The XX Factor
Oct. 1 2014 4:58 PM The Religious Right Is Not Happy With Republicans  

How Did the Royals Win Despite Bunting So Many Times? Bunting Is a Terrible Strategy.

Catacombs Where You Can Stroll Down Hallways Lined With Corpses

Homeland Is Good Again! For Now.

Crime

Operation Backbone

How White Boy Rick, a legendary Detroit cocaine dealer, helped the FBI uncover brazen police corruption.

Music

How Even an Old Hipster Can Age Gracefully

On their new albums, Leonard Cohen, Robert Plant, and Loudon Wainwright III show three ways.

The One Fact About Ebola That Should Calm You: It Spreads Slowly

Piper Kerman on Why She Dressed Like a Hitchcock Heroine for Her Prison Sentencing

Trending News Channel
Oct. 1 2014 1:25 PM Japanese Cheerleader Robots Balance and Roll Around on Balls
  News & Politics
Crime
Oct. 1 2014 4:15 PM The Trials of White Boy Rick A Detroit crime legend, the FBI, and the ugliness of the war on drugs.
  Business
Moneybox
Oct. 1 2014 2:16 PM Wall Street Tackles Chat Services, Shies Away From Diversity Issues 
  Life
Outward
Oct. 1 2014 6:02 PM Facebook Relaxes Its “Real Name” Policy; Drag Queens Celebrate
  Double X
The XX Factor
Oct. 1 2014 5:11 PM Celebrity Feminist Identification Has Reached Peak Meaninglessness
  Slate Plus
Behind the Scenes
Oct. 1 2014 3:24 PM Revelry (and Business) at Mohonk Photos and highlights from Slate’s annual retreat.
  Arts
Brow Beat
Oct. 1 2014 3:02 PM The Best Show of the Summer Is Getting a Second Season
  Technology
Future Tense
Oct. 1 2014 4:46 PM Ebola Is No Measles. That’s a Good Thing. Comparing this virus to scourges of the past gives us hope that we can slow it down.
  Health & Science
Science
Oct. 1 2014 4:03 PM Does the Earth Really Have a “Hum”? Yes, but probably not the one you’re thinking.
  Sports
Sports Nut
Oct. 1 2014 5:19 PM Bunt-a-Palooza! How bad was the Kansas City Royals’ bunt-all-the-time strategy in the American League wild-card game?