WSJ: Why raising the tobacco tax will hurt the states

[unixronin]

Higher taxes discourage cigarette sales.  Nobel economist Gary Becker pegs the long-run price elasticity of demand for cigarettes at 0.8 -- i.e., a 10% increase in price causes an 8% decline in unit sales.  The Obama tax hike translates into a 13.3% increase in the average pack price.  That implies a 10.6% decline in unit sales -- which the National Tax Foundation has calculated adds up to a $1 billion overall revenue loss for hard-pressed states.

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None of this is good for the economy.  Consumers and state governments are already having a tough time making ends meet.  Burdening them with a new $38 billion tax and a $1 billion cut in revenues isn’t going to help create jobs.  Estimates by the National Association of Tobacco Outlets of the job losses in cigarette manufacturing and distribution alone exceed 100,000.

Smugglers and counterfeiters won’t lose their jobs, though.  Both the General Accounting Office (GAO) and the Alcohol, Tobacco, and Firearms (ATF) agency have concluded that the multibillion-dollar cigarette-smuggling business grows with every excise tax increase.  The ATF and GAO also believe that cigarette-smuggling is a form of cash laundering and profits for both organized crime and terrorist organizations.

Comments

[ithildae.livejournal.com]

The states made a HUGE mistake when they entered a settlement with the tobacco industry. They are now committed to the tobacco industry surviving, as a profitable entity, for the foreseeable future. That means that they are unwilling to raise taxes on tobacco products to cover the related health care costs from those products, because it will damage revenue. In effect, the states are subsidizing tobacco in return for a cut of the revenue.

Short term thinking prevails in all government levels right now. (Where do you think business got the idea?) The next budget/election cycle is all that matters. Tobacco is an industry that is, "Too Profitable to Fail".