Too-High Cigarette Taxes Counterproductive, Study SaysJuly 14, 2005
Research Summary
Supporters say raising cigarette taxes can cut consumption and generate revenues for government, but hiking takes too much could be counterproductive, according to a researcher from George Mason University.CNN reported July 12 that researcher Richard E. Wagner contends that when a state's cigarette prices are notably higher than a convenient alternative, it encourages smokers to cross state lines to make purchases or get their cigarettes via the black market. Cigarette smuggling, in turn, also can cause states to lose tax revenues, said Wagner.
"As a result, data on taxed sales no longer track actual consumption in any useful way, and revenue estimates of future tax-rate changes will be even less reliable than they already are," Wagner wrote. Lower taxable sales of cigarettes also can lower the state's payments under the 1998 tobacco settlement, he said.
Experts have long believed that when cigarette prices go up 10 percent, sales fall by 4 percent. But it's unclear at what point larger tax hikes will be offset by declining taxable sales. "You have to think there's some ceiling as to how high you can go," said Harley Duncan, executive director of the Federation of Tax Administrators.
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