Death & Taxes – Government dichotomy?

The World Health Organization believes higher prices deter smoking and limit uptake. As a result they enthusiastically endorse higher tobacco taxes; particulary cigarettes.

Governments, at least many of them, think this a great idea and have happily complied – taxing their constituents almost literally to death. The UK and Brazil are two good examples.

So far so good (if you’re a government) but now the dependence issue takes precedence. The huge tax revenues are hard to give up – so what to do when smoking really declines – impacting that precious revenue stream on which you’ve come to depend?

This was seen in Canada some years ago when the provincial governments of Ontario and Quebec actually reduced taxes to preserve revenue, discouraging contraband in the process.

As taxes rise significantly in the US – with the large Federal tax increases on April 1 and a slew of pending State tax increases – what will be the unintended consequences?

Will Federal and State coffers become dependent? Are they already dependent?

Is this a form of addiction?

Will contraband increase?

What is the impact on gross tax revenues in the long term?

Isn’t it all about the money?

1 comment so far ↓

#1 john rolfe on 04.10.09 at 5:50 PM

Given the high inelasticity of demand caused by addiction – for every 10% increase in price, consumption declines just 3%, no government tax increases result in lost tax revenue, quite the opposite. New Jersey’s hike may be the only exception given the proximity of Pennsylvania and its much lower tax rate – good for outlet stores on the border. We will be seeing an explosion in Internet and Native American sales and now that the Weiner Prevent All Cigarette Trafficking Act exempts the US Postal Service, a continuation in the legality of such sales including those sourced from abroad. Big Business yes.

As for the SCHIP hikes, the additional 4 million kids on government health insurance, plus the other 5 million already there, will need to rely more on more on tobacco sales, which will then require higher tax rates when sales decline. This vicious spiral will drive prices ever higher at the Federal level, forcing the States to go ever higher at the State level, just like they did when the MSA was signed.

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