Raising Federal Cigarette Tax Will Cause Decline in State Cigarette Tax Revenue

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 tax on cigarettes.

Should they do so, it would mean lower tax 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.