A different way to look at this smoking-by-income data is that slightly more than half of today's smokers (53%) earn less than $36,000 per year -- making cigarette taxes highly regressive. Another 35% of smokers earn between $36,000 and $89,999 per year, while only 12% of all smokers make at least $90,000 annually.
Since 1998, governments at all levels have collected more than $400 billion in cigarette taxes and payments from smokers.
Settlement payments, federal, and state and local taxes on cigarettes for fiscal year 2009 amounted to more than $44.3 billion.
Such tax differentials often lead to border shopping — that is, Arkansans might cross the border into states with lower cigarette tax rates in order to spend less money per pack. This creates a problem of tax evasion for the state of Arkansas, as border-shopping deprives the state government of tax revenue it would get if its residents bought the cigarettes in-state instead of going over the border.
This underscores why the real value of sin taxes is their ability to generate cash. After all, taxes that truly succeeded in changing behavior would be self-defeating. If a cigarette tax forced all puffers to quit, there would be severe withdrawal symptoms not only for smokers — but for states that relied on the tax for revenue.
At the same time, the long-term decline in smoking prevalence has reduced the size of the cigarette tax base. The decline means that the marginal revenue productivity of the cigarette tax — the additional revenue that comes from a given increase in the tax rate — has probably fallen.
Cigarettes are the most heavily taxed major category of consumer purchases. Relative to the purchase amount, tobacco products are subject to a higher tax rate than alcohol, three times the tax rate of gasoline, and over 10 times the tax rate imposed on items such as utilities and automobiles.
To determine the optimal sin tax in the case of cigarette smoking, one should assess how this tax should be adjusted to reflect both the potential welfare losses to smokers as well as the losses to society that are not accounted for in private smoking decisions.
...there are several different reasons for raising cigarette excise taxes, including (1) the need to raise revenue; (2) the belief that smokers should pay for the burden they impose on others; (3) the desire to protect children, who may have a poor appreciation of both risk and addiction and a tendency to undervalue the future; and (4) the objective of improving public health.
It is therefore not surprising that the tobacco industry vehemently opposes increases in tobacco taxes. The tobacco industry usually contends that increasing tobacco taxes will inevitably lead to illegal contraband of tobacco products, notably cigarettes. Discrepancies in tobacco prices between countries, it is argued, create an incentive to smuggle.
Last month, New York law enforcement authorities announced the arrest of Queens resident Rafea al-Nablisi for smuggling 12,000 cartons of cigarettes a week. It was not the first such arrest, and thanks to New York's latest cigarette tax hike, it will not be the last.
On April 23, less than two weeks after Mr. Nablisi's arrest was made public, Gov. David Paterson signed into law a $1.25 per-pack tax hike on top of the state's $1.50 per-pack tax.