Revenue, abstinence…or maybe neither?
Our story starts in New York State. Recognizing the health risks of cigarettes and the potential for generating revenue, New York State levied one of the highest cigarette taxes in the country. As a result, throughout most of the state, cigarettes cost an extra $4.35 a pack while in NYC, it is $5.85. Legislators predicted that people would stop smoking or pay a high tax. Either way the state benefited.
But it did not quite work out that way.
The reason takes us to New Hampshire. With the New Hampshire cigarette tax at $1.68 a pack, during 2011, for every 100 packs consumed, 27 were smuggled out. Correspondingly, close to 60% of all cigarettes in NYS were smuggled in from lower tax neighboring states.
Perhaps NYS legislators read what Napoleon III said when urged to forbid smoking. “This vice brings in one hundred million francs in taxes every year. I will certainly forbid it at once–as soon as you can name a virtue that brings in as much revenue.”
Napoleon III might have added that whether looking at sugary drinks, alcohol or cigarettes, sin taxes are about inelasticity. Called price inelasticity of demand, a change in price leads to a relatively small change in the quantity demanded because people want to purchase the item, no matter what it costs them.
With lower tax states nearby, though, New York cannot fully take advantage of inelastic demand for cigarettes.
Sources and Resources: I got my basic facts and maps through Catherine Rampbell’s economix blog, this news article, and from this “think tank” analysis of cigarette taxes and their smuggling chart. For more about sin taxes, we looked at sugary drinks and cigarettes here, here, and here at econlife, and at Econ 101 1/2 (p. 45 for the Napoleon quote).