Cigarette Taxes: It’s All About the Revenue

February 7, 2009

A reader writes in, presumably in response to this piece criticizing the new S-CHIP cigarette tax increase (or maybe this one when it was signed into law):

Taxing cigarette smokers is ABSOLUTELY the right thing to do. How many of my tax dollars go to pay for those uneducated who smoke and probably have no health insurance? Or if they do have insurance my premiums are higher to subsidize the smokers to treat their cancer, emphysema or whatever caused by smoking.

The additional tax may even encourage them to quit smoking, naive…maybe.

Back in 2001, Tax Foundation Chief Economist Patrick Fleenor surveyed the literature, which overwhelming finds that smokers provide a net subsidy to non-smokers. Many of the direct costs imposed by smoking are borne by the smokers themselves, and the remainder (including publicly-provided medical care and higher insurance premiums on others) are more than offset by reduced public expenditures due to shorter lifespan. Fleenor concludes:

Not only do smokers bear the individual health costs of tobacco use, but they also bear the burden of current federal and state government fiscal regimes that transfer tens of billions of dollars from smokers to nonsmokers.

Subsequent studies (such as one highlighted here) have only reaffirmed these conclusions.

I would like to make two additional points. First, even assuming cigarette smokers imposed net costs on society, neither the state nor federal government actually sits down and tries to calculate it when they set tax rates. Tax rates are drawn up rather arbitrarily based on revenue needs. Politics doesn’t seem to be the best mechanism for calculating an accurate reimbursement to society for costs imposed. As mentioned, the evidence seems to conclude that cigarette tax rates now go far beyond compensating society for the costs imposed on it by smokers.

The reader probably isn’t naive to think that additional taxes will induce smokers to quit. But if the goal is to get smokers to quit, why rely on taxation and not just prohibition? Why use government at all? And why treat smoking differently from drinking (less taxed than smoking), bad driving (fined occasionally but not taxed), prescription drug abuse (regulated but not taxed), or other things that kill lots of people every year?

James Madison wrote in The Federalist No. 51: “If a majority be united by a common interest, the rights of the minority will be insecure.” Whatever post hoc rationalization state officials come up with, ultimately it’s about extracting revenue from a poor and unpopular political minority.

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