Cutting Through the Smoke - Facts on the Cigarette Tax

Cutting Through the Smoke: Facts on the Cigarette Tax
SACRAMENTO--Whenever government tries to dictate people's economic behavior the result is usually dismal failure. Why? According to Milton Friedman, it's for the same reason that even the most autocratic head of a family cannot control every act of each family member. Unless commands are supplemented with people's willing cooperation, the commands are often undermined or ignored.

Take, for example, cigarette taxes. Many state governments have increased cigarette taxes in an attempt, basically, to prevent people from smoking. Yet, in a recent report by the Center for the Study of American Business, a research organization at Washington University in St. Louis, economics professor Dwight Lee found that high cigarette taxes haven't had the intended effect.

In 1994, Michigan raised its cigarette tax from 25 cents a pack to 75 cents. A year after the tax increase, legal cigarette sales in Michigan fell 30 percent. The key word here is "legal" cigarette sales. According to the Detroit Free Press, "Michigan's higher tobacco tax has spawned rampant cigarette smuggling." Also, cigarette sales in low-tax states that are only one day's drive from Michigan have skyrocketed. Thus, Prof. Lee notes that even though legal cigarette sales dropped in Michigan, the percentage of smokers actually increased.

In 1988, California increased its cigarette tax from 10 cents a pack to 35 cents. Legal cigarette sales fell 28 percent. However, with the proximity of low-taxed cigarettes in Mexico, Indian reservations, and military bases, contraband cigarettes began flooding the state. Contraband sales account for up to nearly a quarter of cigarettes sold in California. Prof. Lee concludes that in view of these contraband sales, "smoking in California has not declined since the tax increase by any more than the nationwide average over the same period."

Perhaps the most interesting unintended effect of high cigarette taxes is the impact it has on youth smoking. In Canada, cigarette taxes resulted in massive cigarette smuggling (contraband cigarettes made up 30 to 50 percent of the Canadian market, according to Prof. Lee). Recently, Canada drastically cut its cigarette tax rate, not only to reduce smuggling, but also to prevent increased smoking among young people. How could high cigarette taxes cause increased youth smoking? As Prof. Lee writes, "Contrary to the usual argument, many Canadian officials concluded that high taxes made it difficult to control teenagers' access to cigarettes." In other words, the huge black market in cigarettes created by the high cigarette tax actually made it easier for young people to obtain cigarettes. Canadian Health Minister Diane Marleau explained the cigarette tax cut saying, "It will end the smuggling trade and enforce children to rely on regular stores for their cigarettes, where they will be forbidden from buying them until they are 19."

All of this says nothing about the inherent goodness or badness of smoking. Rather, it merely demonstrates once again that when government tries to dictate our behavior through the tax system, people will find a way to exert their freedom. High cigarette taxes may be emotionally satisfying for the anti-smoking brigade, but it is bad public policy.

--By Lance T. Izumi