Smoke Gets in Your Eyes

Democratic Rep. Gene Shelby says he wants to pitch a big tax hike on cigarettes to fund a statewide trauma system. At the same time, state health chieftain Paul Halverson is urging a big tax hike on cigarettes as a way to reduce the number of smokers in the state. Both are quoted in this story by Rob Moritz at the Arkansas News Bureau, which notes that state anti-smoking measures have resulted in some 84,000 fewer Arkansans lighting up since 2002.

I’ve been scratching my head on this, because it seems like the two goals that Halverson and Shelby are pushing conflict, don’t they? This timely Wall Street Journal editorial looks at an analogous situation in Maryland and says “yes, they do conflict,” and critiques “the folly of trying to finance government with a tax on a shrinking pool of smokers.”

Budget gurus: Please clear the air on this and help me understand how this works.

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5 thoughts on “Smoke Gets in Your Eyes

  • August 12, 2008 at 8:20 am
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    Here’s how it works: when we pass a big tax on cigarettes, the disincentive effects will reduce the pool of cigarette buyers as well as the resultant tax revenue. The gap between expected revenue and resultant revenue provides the justification for — yes! — another tax. (Some would say that this is the best of both worlds.) And when the second tax also fails to perform as expected, guess what will be proposed to close the revenue gap?

    On a related note, one big winner from policies like these nationally has been tobacco merchants on Indian reservations, who can do high-volume business at considerably lower levels of taxation.

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  • August 12, 2008 at 8:50 am
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    If I remember from my economics classes correctly, cigarettes are considered an inelastic good, meaning that an increase or decrease in price does not have as dramatic effect on demand compared to most other goods. Although fewer people are smoking, I would speculate that this is due more to health concerns and not economic factors. If this is the case, an increase in tax will not have a strong negative effect on demand.

    In simple terms, there might be fewer people smoking but they will pay whatever the price is for the cigarettes so let’s tax the heck out of them. Maybe we can get them to double dip and buy some of Halter’s lottery tickets with they pick up their Marlboros.

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  • August 12, 2008 at 9:38 am
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    I agree that, generally, with cigarettes you see relatively inelastic demand. Of course, there is still some elasticity in demand, or else nobody would ever be able to quit smoking; it follows that there will be some degree of price sensitivity among cigarette purchasers. Furthermore, if state taxes are raised then price competition from other states — notably, lower levels of taxes beyond our borders — will likely reduce Arkansas cigarette purchases and thus Arkansas tax revenue with respect to purchasers who live near the state line. (The editorial that David Kinkade linked to makes a related point.) These factors put very real and practical limits on the revenue gains we might see from higher cigarette taxes.

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  • August 12, 2008 at 10:23 am
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    True, every consumable good has some degree of elasticity so it will have some effect on demand just not to the degree it would have on a more elastic good. However, I do think that the argument made by Halverson that government should tax cigarettes as a way to reduce the number of smokers in the state is totally erroneous.

    First of all, I don’t believe it will “reduce the number of smokers in the state.” I don’t think that someone makes the decision to smoke or not smoke based on a marginal price increase or decrease. I don’t think anyone is saying to themselves you know if cigarettes were only about 50 cents a pack cheaper I just might pick up the habit. Instead, the decrease in demand will be existing smokers buying fewer cigarettes (or as Greenberg points out buying them across the state line.)

    Second and more importantly, I strongly disagree with the principle of the government is helping people by taking more of our money. The state is not doing smokers any favors by making them pay more for their cigarettes. If Halverson keeps up his argument, then soon they will start taxing my hot wings, cheeseburgers, and french fries as well. Gee, thanks!

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  • August 12, 2008 at 6:01 pm
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    Jason,

    I agree with your point that you “strongly disagree with the principle of the government is helping people by taking more of our money.” But, I still think that misses the most important and fundamental fact that the government has no right nor obligation to “social engineer” public behavior (however ridiculous it may be) through tax policy.

    Of course, I may be too libertarian in my outlook. Even if I am, it seems to me that government shouldn’t be using tax policy to accomplish those ends. If people make poor choices that cause lung cancer then let them, just don’t require me to pay for their treatment. Requiring personal responsiblity would probably be a far more effective deterrent. If not, then stupid is as stupid does.

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