1. The Economics of Cigarette Taxes
Tabitha Peyton
Econ 300
April 27, 2004

2. 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

3. 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

4. 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.

5. Map of New Mexico’s Reservations

6. 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

7. 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

8. Budget Constraints and Utility
Q’Y2
Q’Y1 U1 U0
Q’A1
Q’A2 U1 U0
QY2
QY1
QA2
QA1

9. 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.

10. 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.