The Effects of Cigarette Taxation

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The Effects of Cigarette Excise Taxation

What is probably the fastest growth in taxation in the United States, cigarette excise taxes levied by both the Federal and state governments have shown a distinctive impact relative to supply and demand, equilibrium of price and quantity, and elasticity of the product. The intent of the tax is twofold; to reduce the rate of cigarette usage and to increase revenues for healthcare programs related to the effects of cigarette smoking, such as cardiopulmonary disease, respiratory disease, and illness related to second-hand smoke. Cigarette excise taxes vary greatly from state to state, with rates as of 2004, New Jersey levied the highest rate ($2.05 per pack) while Virginia had the lowest rate (2.5 cents per pack) (Goel and Nelson, 2006). However significant increases have been realized with cigarette excise tax even in major tobacco producing states such as Kentucky, where historically they have been extremely low due to the economic influence of tobacco producers. Tobacco excise taxes for cigarettes are levied on the producers of the product, usually in the form of tax stamps affixed to the individual packs of cigarettes. These taxes are then handed down to the consumer in the form of price increases for the product. According to Gustafson (2007) upon passage of substantial increases in cigarette taxes, a marked increase in the sale of tax stamps occur immediately before the enacting date of the new tax rate, followed by a dramatic decrease in the sale of tax stamps after the tax rate increases. This is a classic case of increasing demand today because it is known that there will be a price increase in the (near) future. But what is the long-term impact on supply and demand relevant to these tax increases? As with any taxed product, the supply curve will shift upwards in direct relationship to the tax increase. So, if the government charges a $1 tax on every pack of cigarettes, and the cigarette sellers want to pass...
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