What is a Tobacco Tax/Cigarette Tax

A tobacco or cigarette tax is imposed on all tobacco products by various levels of government to fund healthcare programs. The tax mainly contributes 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.

BREAKING DOWN Tobacco Tax/Cigarette Tax

Federal and state governments 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.

The terms "Tobacco Tax" and "Cigarette Tax" are used interchangeably. Cigarette tax includes excise tax, sales tax, value-added tax (VAT), and duty tax. Taxes on vices like tobacco and alcohol are also called sin taxes.

The History of the Tobacco Tax

The first excise tax within the U.S. was introduced in 1791 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 a different manufacturer, wholesaler, and retailer pricing and discounting practices.

Highest and Lowest Tobacco Taxes by State

Of the 50 US States and District of Columbia, the 5 states with the highest excise tax (dollars) per cigarette pack as of 2018 are:

  • New York: $4.35/pack
  • Connecticut: $4.35/pack
  • Rhode Island: $4.25/pack
  • Massachusetts: $3.51/pack
  • 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
  • North Carolina: $0.45/pack 

This data is as of January 2018.

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.

Tobacco Taxes at the Municipal Level

Most cities and counties do not have tobacco taxes. For example, the states of Michigan, Washington, and Hawaii have no local tobacco tax. 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 that 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 collected 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.

Do Tobacco Taxes Work?

There is some debate about whether high taxes on products like tobacco work — and that depends on who you ask. The Center for Tobacco Control Research and Education does admit that tobacco taxes contribute to the reduction of smoking and tobacco use in general but says it does not find them very effective. The reason being that since the tax affects the price, small increases will not necessarily dissuade consumers from buying tobacco products. And in these cases — with smaller tax hikes — cigarette companies may even lower their prices to compensate. The increase would, therefore, have to be so large that it would deter consumers from making future purchases and dissuade companies from lowering their prices. 

But supporters of cigarette taxes say otherwise. According to the World Health Organization (WHO), these taxes are the most effective way to reduce consumption and demand. The organization says that higher prices have led to more people quitting and they reduce the chances of a former smoker relapsing. WHO says that, on average, a 10 percent increase in price (including taxes) would account for a 4 percent drop in demand in high-income countries and a 5 percent drop in low- and middle-income countries.