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On Tobacco Taxes

By Brad Rodu

Reprinted with Permission from The Birmingham News, June 18, 1995

The tobacco tax monster has again raised its ugly head in Alabama, with a proposal that the state increase its cigarette tax from 16.5 cents a pack to 28.5 cents. House Speaker Jimmy Clark has given the proposal almost no chance of passing and Governor Fob James has expressed concern over taxing specific products. Nevertheless, tobacco control advocates will continue to push for tax hikes, always framing their efforts as part of a moral crusade against evil tobacco that justifies any measure. But this crusade is far from pure, and many of the tactics of the crusaders have gone unchallenged, except for the beleaguered tobacco companies whose every utterance is dismissed as self-serving. That tobacco use is health-risky is undeniable. That tobacco is evil, mandating a holy war against the industry and the 46 million Americans who use it, is quite another matter. Tobacco excise taxes is one issue where the crusaders have run amok, often with less than impressive results.

First, increases in tobacco taxes are easy to pass, as the state governments of Colorado, Maryland, Arizona, California, Michigan, and Massachusetts have recently demonstrated. These states have taken advantage of Americans' strong support for taxes -- that somebody else has to pay. Seventy-five percent of the American people support higher taxes on tobacco products, which accurately reflects the 3:1 nonsmoker to smoker ratio in the U.S.

Crusaders argue that smokers are draining state and federal healthcare programs and must be forced to pay their way. But this argument is specious. Duke University economics professor W. Kip Viscusi has just completed a study for the National Bureau of Economic Research which estimates that tobacco-related social costs averaging 43 cents per pack are more than compensated by the current average state and federal taxes of 53 cents per pack.

Viscusi's findings confirm the conclusion of a 1989 study from the Rand Corporation and the University of Michigan: cigarette smokers already pay their way. In addition, Viscusi argues that because smokers die younger than nonsmokers -- our research shows that smokers lose almost 8 years of life on average -- they may actually benefit society by siphoning fewer dollars from Social Security, Medicare, and private pensions.

Crusaders claim that increasing excise taxes suppresses cigarette sales, and indeed consumption apparently falls off after tax hikes. Legal consumption, that is. Because in virtually every market where taxes have been increased, a booming black market has followed. Consider the mess created by the Canadian government in the late 1980's by an increase in taxes that drove cigarette prices up to $4.00 a pack. By 1993 a $5 billion smuggling industry was in full swing, with contraband smokes totaling 20-25% of all cigarettes sold in Canada. Taxes were slashed in 1994, and smuggling activity decreased by 90%. The Canadian experience is being repeated in several states where taxes have made smuggling economically feasible. California's high tax costs the state as much as $68 million in lost revenue. In early 1995 one of the largest cigarette-smuggling operations in the U.S. was uncovered in Los Angeles. The estimated cost to the California treasury from this single black market enterprise was $7 million. Last November Arizona raised its cigarette tax by 40 cents a pack. In March of this year state revenue agents confiscated 7,400 cartons of cigarettes from a bootlegger's truck. An official was quoted as saying that the goal for fighting cigarette-smuggling was to "nip it in the bud." Tip of the iceberg might have been a more accurate description.

Some states have been honest about their intentions when formulating tobacco tax increases. Massachusetts and California designed tobacco tax hikes to pay for tobacco control programs. In other words, in these states smokers involuntarily pay for programs to further suppress their activities. But the story doesn't end there, because politicians just can't keep their hands off of these cash bonanzas. In Massachusetts the state Senate slashed the tobacco control budget by 80% in its second year to fund other health programs including treatment for osteoporosis, AIDS, and drug abuse. In California officials from the American Cancer Society, the American Lung Association and the American Heart Association accused Governor Pete Wilson of diverting $100 million from tobacco control efforts. In a curious twist, the California Medical Association supported Governor Wilson because the money was intended for other health initiatives. Anti-tobacco crusaders in both states predictably blame the tobacco industry for the diversions.

The tactics of the anti-tobacco crusade, exemplified by the insistent call to tax tobacco into oblivion, are burdensome, not particularly successful, and often unnecessary. And they betray a singular prohibitionist strategy that will fail for tobacco as surely as it failed for alcohol earlier in this century.