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The Economics of Cigarette Taxes
Tabitha Peyton Econ 300 April 27, 2004
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Background Recently, governments have been increasing cigarette taxes to make up for large budget deficits They justify these actions by stating that it will decrease the number of smokers which in turn saves lives and reduces related health costs in the future Large settlements between the tobacco companies and the states can also be seen as tax increases
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Things to Consider There are many things that affect the success of these tax increases: Internet sales Native American reservations Proximity of neighboring states and their cigarette tax level Consumers Elasticity of Demand
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New Mexico’s Case New Mexico has many Reservations with several in close proximity to the bulk of the population. NO state sales taxes are paid on New Mexico’s Reservations. Neighboring states aren’t close. Price elasticity of demand for adults is estimated to be in the range -.3 to inelastic demand. Price elasticity of demand for teenagers is estimated to be in the range -.66 to more elastic demand.
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Map of New Mexico’s Reservations
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Tax Affects S + tax P This is what the consumer pays S Tax P2 P1 PS
This is what the producer pays Q Q2 Q1
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Elasticities Price Demand of a person (adult) who has been smoking for a long time and is very addicted Price Demand of a person (teenager) who has not smoked a lot and is less addicted or is not addicted P2 P2 P1 P1 Q2 Q1 Quantity Quantity Q2 Q1 Inelastic Demand Elastic Demand
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Budget Constraints and Utility
Q’Y2 Q’Y1 U1 U0 Q’A1 Q’A2 U1 U0 QY2 QY1 QA2 QA1
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Conclusions So far tax increases by the states have led to increases in revenue and decreases in consumption Can not increase with out bound. The amount of people who quit and generate losses in revenue must not exceed the revenue generated by those who don’t quit.
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Interesting Statistics
The government made over 74 million dollars a day from smokers between 1998 and 2002 which means the government made more money in one minute from cigarette taxes than the average family makes in a year. Annual Federal cigarette excise tax collections (gross) $7,512,700,000 Annual state cigarette excise tax collections (gross) $8,544,531,00 Governments make more money from cigarettes than retailers, wholesalers, farmers and manufactures combined Smoking kills more than alcohol, aids, car crashes, illegal drugs, murders, and suicides combined.
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