Growing Up Tobacco Free Preventing Nicotine Addiction in Children and Youths (1994) / Chapter Skim
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6 TOBACCO TAXATION IN THE UNITED STATES
6 TOBACCO TAXATION IN THE UNITED STATES
Pages 177-196
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From page 177... ...
In 1993, all states and most localities used a unit tax for taxing cigarettes and ad valorem taxes for non-cigarette tobacco products. In 1993, consumer excise taxes on tobacco generated more than $12 billion in tax revenue, 98% of which was derived from taxes on cigarettes.
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From page 178... ...
In November 1988, California voters passed Proposition 99, which increased the state cigarette excise tax from 10 cents to 35 cents per pack and earmarked 20% of the additional revenue raised for a statewide antismoking campaign.9 Similarly, in November 1992, voters in Massachusetts passed an initiative to increase the tax on cigarettes by 25 cents per pack and on chewing tobacco by 25%. In addition to state excise taxes, over 440 local jurisdictions in 9 states also levy taxes on tobacco products.
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From page 179... ...
A 1985 study by the Advisory Commission on Intergovernmental Relations concluded that the Ciga rette Contraband Act had markedly reduced organized interstate smuggling of cigarettes. i2 However, the casual smuggling of cigarettes from neighboring states and the purchasing of cigarettes from tax-free outlets continues to be a problem for many states with high cigarette taxes.~3 A recent analysis of tobacco product sales at U.S.
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From page 180... ...
Figure 6-2 shows trends in cigarette taxes and pack prices adjusted for inflation. The amount of tax on a pack of cigarettes as a percentage ::: of average retail price has :- decreased steadily since 1955.
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From page 181... ...
In order to appreciate economic incentives or disincentives to use tobacco products, one must consider not only price changes but also price affordability. Over the past half century, tobacco has become increasingly more affordable to consumers in the United States because of rising income.is Table 6-2 shows
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From page 182... ...
The decline in revenues from tobacco taxes partly reflects a steady drop in per capita cigarette consumption since the mid-1970s. However, the primary reason for the declining revenues is the fail TABLE 6-2 Changes in the affordability of a pack of cigarettes in the United States between 1955 and 1990, using 1955 as the base year % Change in affordability relative to 1955 State and YearFederal taxes federal taxes Average pack price 19550% 0% 0% 1960+14% -1% +4% 1965+33% +2% +13% 1970+51% +15% +17% 1975+67% +43% +32% 1980+80% +61% +45% 1985+71 % +57% +35% 1990+78% +60% +23% Note: "+" indicates an increase in affordability relative to 1955; "-" indicates a decrease in affordability relative to 1955.
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From page 183... ...
ure of the federal government to adjust cigarette tax rates to keep pace with inflation. For example, figure 6-3 shows that the decline in federal tobacco tax revenues occurred despite the fact that total cigarette sales were nearly identical in 1993 and 1963.
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From page 184... ...
The combination of lower cigarette taxes and a higher standard of living (that is, more money to spend on goods) makes cigarettes much more affordable for Americans than for persons in nearly all other industrialized countries.
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From page 185... ...
Increases in excise taxes are usually passed on to consumers.23 Thus, to determine the effect of a tax change, the price elasticity of demand must be multiplied by the percent change in price resulting from the tax change. In addition to taxes, the retail price of tobacco products is determined by the manufacturer's costs and profits and wholesale and retail markups.
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From page 186... ...
dollars as of December 19931.28 In addition to increases in cigarette taxes, federal and provincial governments implemented other measures to limit smoking, including banning smoking in public buildings and prohibiting tobacco advertising on billboards, at the point of purchase, and at sporting events.29 Between 1982 and 1992, total per capita cigarette consumption in Canada, adjusted for estimates of tobacco smuggling, fell by 38%.3° An analysis comparing the slope of the decline in per capita tobacco consumption in the United States and Canada reveals that during the 1980s consumption dropped 30% faster in Canada than in the United States.3i A 1991 independent investment research report on Imperial Tobacco, the largest of the three Canadian tobacco manufacturers, concluded that a large share of the reduction in cigarette consumption in Canada between 1982 and 1990 could be attributed to price increases in cigarettes, primarily from higher federal and provincial taxes.32 The report also concluded that prices still are a major determinant of levels of smoking and that there is no indication that consumption was less responsive to price increases in 1991 than in 1980. Declines in cigarette smoking prevalence have mirrored trends in per capita sales.
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From page 187... ...
A comparison of the smoking habits of teenagers and adults showed that younger Canadians were more sensitive to price changes than adults. Overall, the study concluded that "On balance, federal tax increases since 1985 have resulted in a net decline in overall tobacco consumption in Canada."36 Adolescents' Sensitivity to Price The issue of whether adolescents respond differently than adults to changes in tobacco prices is of interest for several reasons.
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From page 188... ...
The index measuring state antismoking regulations was found to have a significant effect on cigarette consumption by teenagers, leading the authors to conclude that restrictions on indoor smoking may have a greater impact on preventing youths from initiating smoking than do increases in cigarette prices. However, critics of this study point out that antismoking regulations are not likely to have any direct impact on youths because youths spend most of their time in school; instead, the regulation may merely reflect the level of antismoking sentiment in a region.44 Other critics point out that the study did not take into account the rapid market growth of discount cigarettes in the United States during the late 1970s and 1980s, which offered price-sensitive consumers a range of very cheap products.45 Because of the wide differential in price between discount and premium brands, average retail price (used in the study to measure price)
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From page 189... ...
between 1980 and 1989 found that the decline in smoking prevalence among teenagers was steeper than for the total population.48 Teenage smoking declined by 52%, from 45% to 22% between 1980 and 1989, while smoking in the total population age 15 and older declined by only 23% (from 41% to 31%J. Figure 6-4 illustrates the price sensitivity of Canadian teenagers by juxtaposing teenage smoking trends between 1979 and 1991 with changes in the average retail price for 20 cigarettes.
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From page 190... ...
A 50cent increase wouldn't make any difference." ARGUMENTS FOR AND AGAINST HIGHER TOBACCO TAXES The data from research on the relationship between cigarette prices and cigarette consumption support the conclusion that substantial increases in cigarette excise taxes will reduce cigarette smoking.52 The higher price of tobacco products would encourage individuals to stop smoking or to smoke less, and would discourage children and youths from initiating smoking. Despite the fact that only a few studies have actually examined the relationship between
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From page 191... ...
However, high taxes on tobacco products are desirable because they would discourage use of the nation's leading cause of preventable death.56 Opinion polls and the recent successful ballot initiatives in California and Massachusetts indicate that the public is willing to support substantial increases in tobacco taxes.57 The level of public support for higher tobacco taxes tends to increase when revenues from those taxes are earmarked for specific purposes such as deficit reduction or health care financing.58 In 1992, seven states were using cigarette tax revenues to finance tobacco-related public health programs.59 Opponents of tobacco taxes argue that these taxes are undesirable because they unfairly affect the poor. A 1990 report by the Congressional Budget Office supports the widely held belief that tobacco taxes are regressive.
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From page 192... ...
Moreover, revenues generated through higher tobacco taxes could be earmarked for health care for the indigent, thus offsetting the regressivity of tobacco taxes.65 Loss of tobacco-related jobs and the potential economic consequences of such job loss on the economy is another argument used to oppose increases in tobacco taxes.66 However, of the 2.3 million jobs claimed by the Tobacco Institute to be dependent on tobacco,67 only 11% are directly involved in growing, warehousing, manufacturing, or wholesaling tobacco products. The remaining 2 million jobs are in sectors of the economy (retailing, supplier jobs)
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From page 193... ...
A reasonable target would be to increase the federal cigarette tax by $2 by 1995. Accomplishing this objective would also have the added benefit of reducing illegal smuggling of tobacco products between Canada and the United States.
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From page 194... ...
"The Effects of State Cigarette Tax Increases on Cigarette Sales, 1955 to 1988." American Journal of Public Health 82:1 (1992) : 94-96; Department of Finance Canada.
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From page 195... ...
GAO/HAD 89-119, 1989; and Non-Smokers' Rights Association of Canada. Average Retail Selling Price and Total Tax Incidence for a Pack of 20 Cigarettes in Various Countries as of December 1, 1993.
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From page 196... ...
Tobacco Industry Employment: A Review of the Price Waterhouse Economic Impact Report and Tobacco Institute Estimates of Economic Losses from Increasing the Federal Excise Tax. Los Angeles, CA: Arthur Andersen Economic Consulting, 6 Oct.
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