Missouri Considers Quintupling Its Cigarette Tax

October 26, 2012

Despite repeatedly voting it down, Missouri voters will yet again be faced with a ballot measure this November that would raise the state cigarette excise tax. Proposition B would raise the cigarette tax from 17 cents per pack, currently the lowest in the nation, to 90 cents, which would rank 32nd in the nation.

The first problem with this tax hike is that it would fall disproportionately on low-income individuals. An additional few hundred dollars in taxes per year affects a minimum wage worker much more so than a millionaire. In addition, we also have good evidence that low income individuals are more likely to be smokers, and this amplifies the regressivity of the tax increase.

Some support special higher taxes on products if they can be justified as a “Pigouvian tax,” or a tax designed to compensate society for negative societal effects of the activity. For tobacco, such “negative externalities” could include health care costs, because much of health care spending is shared by all taxpayers through public programs like Medicare and Medicaid and third parties might bear some of the cost of smokers’ health expenses. However, according to several reputable studies, most of the costs of smoking are actually borne by smokers themselves.

Economist Kip Viscusi finds that a high cigarette tax is unnecessary because other measures already take care of the cost shifting. Viscusi points out that while smokers do in fact utilize socialized programs like Medicare and Medicaid, they also die sooner, meaning they use a much smaller percentage of Social Security and pensions, offsetting their overall shared costs to society. Depending on the discount rate used in the calculation, Viscusi finds that smokers may actually be a net boon to society. If you follow Pigouvian logic, this means that we should actually subsidize tobacco, not tax it.

Prop 8 is not completely without merit though, as it eliminates a special carve-out for smaller tobacco companies. Since the Tobacco Master Settlement Agreement (MSA) in 1998 between the four biggest tobacco companies and the government, the companies pay a fee each year that is intended to help with the societal costs of smoking. Currently smaller tobacco companies get the money back every year, supposedly as a way to allow them to compete with the major tobacco brands. This goes against the basic tax principle of neutrality as it favors certain companies over others.

Even though it makes the tax more neutral, Prop 8 is still not effective policy. Fifty percent of the revenue from the tax increase will go to Missouri public schools, thirty percent to higher education, and just twenty percent to programs designed to keep people from smoking. Since education is ostensibly for everyone’s benefit and is provided as a public service, a better approach is for all society to share this cost instead of singling out an unpopular group to shoulder heftier burdens.

Follow Scott Drenkard on Twitter @ScottDrenkard.

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