Cigarette taxes are often increased in an attempt to curb smoking rates. When I first thought about this approach, it seemed fraught with contradictions. After all, aren't governments benefiting from smokers by raising cigarette taxes?
When smokers quit smoking, how does the subsequent reduced revenue stream affect government programs paid for by cigarette taxes? Don't governments really need smokers to provide this tax money? If so, what incentive is there for them to try to reduce smoking rates?
In other words, governments win when they raise cigarette taxes and they lose tax money when smokers quit smoking. If I were a legislator, I would do what I could to keep the money coming in. I would not want to see smoking rates reduced. I would work with tobacco farmers to subsidize their income and ensure a regular revenue stream so cigarette companies can succeed in producing more cigarettes, which I could then tax.
In fact, from what I can tell, this is what happens in the US. In recent farm bill acts, the subsidies for tobacco farmers has not been changed even though tobacco farmers earn much more money per acre than other farmers and the disparity may be even greater in foreign countries. Smokers really pay for their tobacco on multiple fronts, and nonsmokers help foot the bill, too.
But interestingly enough, raising tobacoo taxes does lower smoking rates, especially among youth and low-income people. Every time a state raises taxes 10%, there is a 7% drop in youth smoking and a 4% overall drop. Smoking-related illnesses also drop over time and this reduces the health cost burden on states.
Reductions in smoking rates are predictable and can be planned for by governments developing long term budgets. And it turns out that this pattern is even more predictable than income from corporate taxes due to economic fluctuations. A full report on the pros and cons of raising cigarette taxes can be found on the Tobacco Free Kids website.
One recent finding may undermine some of this apparent success, however. Smokers who are forced to reduce the number of cigarettes they smoke because of cost are more likley to inhale what they do smoke more deeply and hold that smoke in longer.
This compenstory behavior mirrors what happens when smokers cut back to "light" cigarettes - the body conciously or unconciously compensates for nicotine reduction by doing what it can to maintain a certain blood sauration level. This kind of smoking is more harmful because deeper areas of the lungs are exposed for longer times to all of the carcinogens in cigarette smoke. You can read more about this study at http://ideas.repec.org/p/ucd/wpaper/200818.html.
So perhaps the jury is out on this topic. If we force smokers to cut back due to cost, are we inadvertently hurting them by causing more illnesses? Where is the government savings then? And how much of that cigarette tax money is going toward smoking cessation and prevention programs anyway?