You Decide: Should Cigarette Taxes Be Increased?

A proposal in the U.S. Congress would increase the federal tax on cigarettes by 20 cents per pack. If passed, this would almost double the existing federal tax of 24 cents per pack. It would be the sixth hike in federal cigarette taxes since 1941.

The additional cigarette tax is estimated to raise $15 billion in revenue over five years. More than half the federal revenue would be earmarked for health insurance costs for children in low-income families.

Several questions are raised by the idea of increasing cigarette taxes. First, how would the higher taxes affect the economy of the leading tobacco state, North Carolina? Also, who would ultimately pay the taxes? Last, is the idea of having smokers help pay for the health insurance of low-income children a good one?

Although the relative importance of tobacco to the North Carolina economy has declined in recent decades, tobacco is still a significant industry in the state. Approximately 5 percent of the state's $200 billion annual income can be directly attributed to the tobacco and cigarette industries. When other industries which do business with tobacco are included, the share rises to 10 percent.

A 20-cent increase in the federal cigarette tax is estimated to reduce domestic cigarette consumption by between 1.3 and 2 percent. This could cost the state economy as much as $360 million in income from reduced sales in the tobacco and cigarette industries and in the companies that do business with them. In addition, it's estimated that North Carolina smokers will pay $113 million more each year in cigarette taxes from the 20-cent tax hike.

Of course, many medical experts argue there are substantial health benefits to society when smoking declines, and so a higher cigarette tax helps serve this purpose.

Another element of the proposed cigarette tax increase is who would actually pay it. Obviously, smokers pay cigarette taxes, but some interesting facts emerge when we look at the incomes of smokers.

Research has established that smoking declines as household income rises; that is, the higher a person's income, the less likely that person is to smoke. The Tax Foundation estimates that 34 percent of cigarette taxes is paid by households earning less than $15,000 annually, and 60 percent of cigarette taxes is paid by households making under $30,000 a year. Only 10 percent of cigarette taxes is paid by households making more than $75,000 annually.

Translating these percentages into dollar amounts, smokers earning less than $15,000 a year will pay $5 billion over five years of the $15 billion raised by the 20-cent cigarette tax, and smokers with annual incomes under $30,000 will pay $9 billion. Smokers earning more than $75,000 will pay $1.5 billion of the tax bill.

The fact that lower income households will pay the vast majority of a new cigarette tax creates an interesting issue when contrasted to the major use of the tax revenues. Supporters of the new cigarette tax want the majority of the tax revenues to pay for health insurance for children of low-income parents. But this means that low-income households with members who smoke will be taxed to pay for health insurance for low-income households!

To use an analogy, this is like Robin Hood robbing the poor to help the poor.

Certainly, there are many questions related to the issue of providing health insurance to all citizens, including children, who don't have it. However, if universal health insurance for children is a national goal, then public finance principles suggest that all citizens should fund it, not just smokers. Presumably, healthy children do better in school and become more productive citizens, and this benefits all citizens, smokers and non-smokers alike.

Only if it can be established that smokers cause low-income children not to have health insurance, or that smokers increase the health-care costs of children in low-income families, would policy makers be justified in taxing only smokers to pay these costs? However, even if these links are established, there's still the fact that the cigarette tax hits primarily low-income households.

None of these comments should be construed as being either "pro or con" regarding smoking. Regardless of one's position on smoking, it is important to consider the impacts and incidence of cigarette taxes, just as it is for any other tax. After considering these results, you decide if cigarette taxes should be increased.

Dr. Walden is a professor and North Carolina Cooperative Extension Service specialist at North Carolina State University.You Decide endeavors to provide a balanced look at a variety of economic, public policy and personal finance issues. This feature is provided every two weeks by Dr. Walden and the Department of Agricultural Communications at NC State University.