We’ve posted a new commentary here that gives a brief, quasi-technical look at the issue of double marginalization when it comes to more than one layer of government taxing a single product. We examine this issue in the context of the current debate over whether the federal government should raise the federal excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on cigarettes.
Should they do so, it would mean lower taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue for state and local governments that tax cigarettes. It works the other way too — should the states choose to increase their tax, federal tax revenue would then fall. In this political climate where smokers are the first choice for politicians to tax, the result could end up being government (as a whole) over-taxing cigarettes relative to the optimal revenue-raising point, even though states and the federal government could be maximizing their own revenue given the actions of others.
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