Tobacco Tax / Cigarette Tax

DEFINITION of 'Tobacco Tax / Cigarette Tax'

A tax imposed on cigarettes to help pay for healthcare for the state's poor and contribute to cancer research and smoking prevention and cessation programs. The idea behind the cigarette tax is that it would lead to a reduction in the demand for tobacco products, especially among youths.

"Tobacco Tax" and "Cigarette Tax" are used interchangeably

BREAKING DOWN 'Tobacco Tax / Cigarette Tax'

Federal and state government impose a tax on all tobacco products, which means that tobacco consumers are responsible for paying the tax. Types of tobacco products include cigarettes, pipe tobacco, cigars, hookah/shisha tobacco, snuff, etc.

Cigarette tax includes excise tax, sales tax, value added tax (VAT), and duty tax. The first excise tax within the US was introduced in 1794 by the secretary of the treasury, Alexander Hamilton. Since excise taxes are levied on the sale and production for sale of tobacco products, the price offered to buyers is higher relative to the price of other goods and services. This is because the producers, manufacturers and wholesalers pay the excise tax and in a bid to recover the tax paid on these products, they inflate the price which is transferred to the final consumers. Each state has different prices due to varying state tax rates in addition to different manufacturer, wholesaler, and retailer pricing and discounting practices.

Of the 50 US States and District of Columbia, the 5 states with the highest excise tax (dollars) per cigarette pack are New York – $4.35/pack, Connecticut - $3.90/pack, Rhode Island - $3.75/pack, Massachusetts – $3.51/pack, and Hawaii - $3.20/pack. The lowest state cigarette taxes are in Missouri - $0.17/pack, Virginia – $0.30/pack, Georgia – $0.37/pack, North Dakota - $0.44/pack, and North Carolina - $0.45/pack. This data is as of April 2017.

Most cities and counties do not have tobacco taxes. For example, the states of Michigan, Washington, and Hawaii have no local tobacco tax stemming from any of their cities. Some states have multiple local taxes, while some others have only one. New York City, for example, is the only locality in the state of New York with cigarette taxes. Of the 8.5 million residents of NYC, it is estimated that about 900,000 smoke and that 12,000 die annually from tobacco-related illnesses. In April 2017, the city proposed a bill which would increase the taxes on cigarettes and other tobacco related products with the hope that the number of smokers will be trimmed down to 160,000 within the following three years. The additional revenue gotten from the price hikes is to be used to fund public housing in the city. In addition to increasing the price for all tobacco products, the bill will also ban pharmacies from selling tobacco products, reduce the number of tobacco retailers in the city, and require all residential buildings to have a non-smoking policy.

Critics of tobacco taxes state that since smoking is an addictive habit, increasing the price of tobacco products would do little to curb the number of sales made. Instead, the number of illegal sales of untaxed cigarettes that come into the city from low-tax states will increase.

Taxes on vices like tobacco and alcohol are also called sin taxes.