From the Contributing Editor:
Blowing some smoke

Is smoking bad for your health? Yes. Should you smoke? No. Do I care if you smoke or not? No, that’s your business. I just wanted to get that out of the way.

Mississippi is facing a large budget deficit, somewhere between $450 and $700 million, and the administration is under a lot of pressure to make up the difference by raising taxes as opposed to cuts in services. The group Communities for a Clean Bill of Health is proposing a tax increase of $1 per pack of cigarettes. Their rationale is that this would bring more money into the state’s coffers and would also help reduce smoking (especially among young people by making it too expensive for them to start), which would translate into health care cost savings since it would reduce smoking related illnesses. The question is: Really?

First, set aside the moral and ethical questions on the whole “to smoke or not to smoke” issue, and let’s look at some basic economics. Currently Mississippi taxes cigarettes at 18 cents per pack, well below the national average of 84 cents per pack. Keep in mind this is in addition to a federal tax of 39 cents per pack. The State Tax Commission says that, based on past sales, an increase of $1 per pack would result in $287 million in additional revenue to the state. The catch here is the assumption that sales would remain the same, and they would not. As the CCBH hopes, some smokers would quit and others would cut back because of the increase in the price to the consumer. Yes there is some inelasticity here thanks to the addictive nature of tobacco, but per pack sales would not remain the same.

Then there is the problem of the black market. Our current tax is more or less in line with our neighboring states. If our per pack price were suddenly 70 to 90 cents higher, then there would be incentive for people to cross state lines to buy cigarettes for personal consumption or to resell. New York and Chicago recently experienced this problem, but it is best illustrated by Canada’s attempt to tax cigarettes at a very high rate.

The Cato Institute relates that in the late 1980’s Canada imposed a high tax on cigarettes. In no time flat, smugglers were lugging trunk-loads across the border. It got so bad that the Canadian government estimated that around 40% of all cigarettes smoked were bought on the black market. They also found that the smugglers didn’t card their customers. Imagine that. So Canada was forced to lower its tax in order to control sales to minors! One more point - we are seeing the reverse of this flow in the prescription drug industry right now with Canada and Mexico.

So the estimate of $287 million in additional revenue does not take into account lost sales due to quitters, to the other states, or to black marketers, and the real number I believe would turn out to be substantially lower. And, unfortunately for the CCBH, under age smokers might actually gain more access to cigarettes through the black market.

On the ethical side of the question, a “sin” tax is an easy sale politically speaking. The problem is that a tax on cigarettes disproportionately affects the poor. The Cato Institute says that with such a tax…

“…officials can claim that revenue with a certain moral rectitude because it's generated by behavior many people find undesirable. It's certainly easier to sell a tax on bad habits than increase taxes on hard-earned income.

But sin taxes are also terribly regressive. Not only are the poor more likely to smoke, they spend a far greater percentage of their income on tobacco when they do. And a 2001 report by the Congressional Budget Office concluded that while tobacco taxes encourage people to quit smoking, those people are most likely to be from the middle- and upper-income brackets, probably because the affluent can afford to try more effective anti-smoking programs, more easily substitute another vice for tobacco, or generally are less likely to need solace in the butt of a cigarette.

That means an already regressive tax actually grows more regressive over time, as more middle- and upper-income people quit, while lower-income people continue to smoke. Meanwhile, government grows as dependent on the sin tax's revenue as taxpayers are dependent on the sin. “

For the moral question on smoking, the debate becomes one once again about individual choice and responsibility. If you choose to smoke, you accept the risks. You’ll shorten your life depending upon how much you smoke, though a study by Robert Levy shows that the vast majority of smoking related deaths occur after age 70.

On the grim side of things, as far as saving money for the state, think about this: If someone were to die prematurely from a smoking related illness, then all costs that would have been incurred from all other medical complications from old age will not be incurred. Put another way, some economists believe that it may be cheaper for states to pay the short term costs of smoking related illnesses than the longer term costs of the other illnesses. And the federal government doesn’t mind if you cash in early. Then they get to keep all that Social Security money you’ve been paying in your whole life.

Frankly the whole thing is disingenuous. You’d think the State Tax Commission would be running ads promoting smoking since they want to raise revenue from cigarette sales. Can’t you see a “Light Up for Mississippi” or a “Blow Some Smoke, Mississippi” ad campaign? The idea of raising taxes on cigarettes to raise money for the state and at the same time persuade people not to smoke seems a little schizophrenic and unlikely to deliver fully on either promise DBJ

Jamie Smith
DBJ Contributing Editor

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