USA triples the tax on cigarettes

I will resist the temptation to roll out the usual cigarette puns .... smokers fuming over tax rise etc etc ...but the news that the Federal tax on puffing away has risen so much remains of interest to economists….

The US government has introduced a huge rise in the tax on cigarettes - reported here by the BBC. For a 10-pack carton, the tax leapt to 10.06 dollars from 3.90 dollars.

It is a good example of how large scale increases in indirect taxes are needed to have a significant impact on demand and the timing of the tax hike is also interesting - is it better to raise taxes during an economic slump when household budgets are under great strain? Does this give people just the right incentive when they might be considering cutting back or stopping altogether? Note too that the article mentions how the extra tax revenue will be used - to pay for health care for uninsured children - an example of ‘earmarked’ or hypothecated taxation at work. Always assuming of course that the tax jump does lead to more revenue coming in.

Keep in mind that this is a federal tax and that individual states can (and do) levy their own supplementary duties on packets or cartons of cigarettes. With the combined city, state and recently raised federal tax, smokers in New York City pay about $10 per pack - $4 higher than in many southern states and a clear incentive for smuggling!

Higher taxes, health warnings, bans on smoking in public has reduced per capita consumption in the USA from almost 4,300 annually in 1965 to below 1,700 now but the market remains highly profitable.