Howard County Blog

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Tuesday, November 21, 2006

Is a $1 increase in the state cigarette tax on the way?

Tax revenue goes to finance programs deemed necessary or desirable by our elected officials. We can't have good schools or police protection for free.
One piece of legislation to be introduced in the next session of the state legislature would increase the cigarette tax by $1 in order to provide revenue for programs related to health. It can be argued that such a tax increase would have a doubly beneficial effect. Not only would it raise revenue for necessary or desirable programs, but it would also discourage smoking and improve the health of smokers or prospective smokers by making it a more costly habit. Such a health improvement for smokers would reduce public health costs all by itself.
Would you favor such legislation or are you one of those for whom the idea of higher taxes is always bad and that our principal aim should be to cut them?

15 Comments:

Anonymous Anonymous said...

This is a great idea, it should be higher, except it would create a black market. I smoke, I don't want to pay more taxes, and raising this by a dollar or even 5 dollars is not what will stop me from smoking. The tax should go to the medical care of the smoker and to the caregiver. God loves a caregiver, they go thru too much pain without asking for anything for them selves, but only God and the caregiver knows the pain.

10:42 AM  
Anonymous nina basu said...

While I support increasing taxes on cigarettes, I think there's a whole host of issues that come into play.

1) Sales taxes are regressive. As much as I might think people shouldn't smoke, it is an addiction, and extremely difficult to give up. A dollar a pack hits poor smokers harder than other smokers. It's easy to say people shouldn't smoke, harder to help people quit.

2) Access to cessasion services - as well as advertising of these services - needs to be better in order to assist smokers who want to quit, especially ones who can't afford cessasion aids, therapy (or childcare and transportation to get to free therapy), and so forth.

3) As anonymous pointed out, black markets exist for cigarettes, especially in the internet marketplace age. At my last workplace, there was a guy who sold cigarettes, purchased on the internet, under the table. He made an absolute killing. Policing black markets is difficult - and is necessary in order to make the increased price point, as well as tax revenue collection, plausible

12:32 PM  
Anonymous David W. Keelan said...

Just remember the law of diminishing returns.

If the price of something rises too high then people will stop using it then you run the risk of actually lowering the amount of tax revenue.

Simple economics.

No, I am not opposed to this depending on for what the revenue is to be used.

12:33 PM  
Anonymous Anonymous said...

I desperately want my husband to stop. A dollar tax wont deter him. If the tax goes through the revenue should be used for stop smoking programs. An aggressive campaign should be launched with that revenue.

12:37 PM  
Anonymous Anonymous said...

anon #1

David - you are all Republican - all business

Nina - good Democratic, little business, more people oriented.

anon #2 your right on target. I also hope your Husband stops, your too sweet, thinking of him first, to become a caregiver.

4:27 PM  
Anonymous David W. Keelan said...

Anon,

I am all business because I am a businessman, not because I am a Republican.

My point is that if an additional $1.00 per pack of cigarettes actually leads to a decline in overall tabacoo tax revenues then they will not meet the stated purpose for the increase, additionally existing programs could suffer as well. Such is the problem with use taxes.

One doesn't need to be a businessman to consider that possibility. I am sure that the treasurer and comptroller will give it consideration. They are not business people.

The stated purpose for the increased tax is for increasing health services. If that is the intended purpose then I support it.

If I were running for political office I would lead with the soft side of the issue (health services) instead of the hard dollars side. In the background when considering the actual implementation of that policy I would consider the rule of diminishing returns in order to ensure we wouldn't jeopardize new and existing programs. I would hope you would want elected officials to do the same.

4:59 PM  
Anonymous Anonymous said...

Another anon's view -

It's a good idea. 100% of those dollars collected should go to cessation programs and healthcare costs incurred by the state as a result of smoking. I don't know if a $1 increase is the right amount, though.

Should it be an amount sufficient to cover the entire healthcare costs the state incurs as a result of smoking and the entire costs of providing adequate cessation programs to meet the needs of every person struggling to quit? If so, is that less or more than $1?

Yes, an ancillary benefit of the higher cost is dramatically decreased underage smoking, too. Canada saw exactly that happen when they increased this tax.

Yes, it would increase illegal imports, but so what? That can be addressed via law enforcement and shame on those selling such goods to the detriment of the community's health and tax burden. The overall effect is lives are being saved.

As far as diminishing returns go, I hope diminishing returns are achieved. That would mean the tax worked.

Are saved lifes taken into consideration when making that diminishing return calculation? Perhaps we could get some help determining that value from a child who just lost their parent.

In the long run, we'll be able to cut taxes necessary to address this problem when the problem's been licked and wind up with a net positive, in more ways than one.

12:43 AM  
Anonymous Anonymous said...

A couple of years ago, Willie Don Schaefer as Comptroller had the State Police (I believe) actively hunt for transporters of illegal cigarettes. He caught quite a few, too. Perhaps if the State enacts the $1.00/pack tax, it will also encourage Peter Franchot to follow Willie Don's example on enforcement.

Certainly, more state money should support smoking cessation programs, particularly among those receiving Medicaid.

12:42 PM  
Blogger FreeMarket said...

The law of diminishing returns does not apply here. A dollar increase in tax just causes fewer people to demand cigarettes. Law of diminishing returns has to do with the marginal productivity of inputs decreasing after a certain point, holding capital and other inputs constant. For example, each employee you hire makes your business more productive, until everyone is standing shoulder to shoulder and no one can move. Raising the price of a good and noting fewer units of that good consumed is something different.

The thing to keep in mind is that the demand for cancer sticks is fairly inelastic. Marginal price increases do not have much effect the quantity of cancer sticks demanded, especially in the short term. It pains me to think that the State is paying for the cost of medical treatment for smokers, as those costs should be the liability of the tobacco companies. It is easy for big companies to sucker the government into paying the bills of the companies, be it health care, environmental costs, or even starting wars so your company can have record profits. Governments are stupid.

5:56 PM  
Anonymous nina basu said...

Fremarket, you're my kind of libertarian.

The elasticity question is in my mind fascinating. From a purely social science perspective, what is the cost of quitting? At what price point does macro-population level motivation increase? Or is there no such price point? It seems to me that many people are willing to forgo *everything* for a cigarette - that the addiction is extreme.

See, I personally am most concerned about the state's ability to police the black market - the costs of enforcing the tax. If that cost can be bundled into the cigarette tax increase, the policy would be more effective.

David:

Assuming that there was no tax-free way to get cigarettes, diminishing revenue might lead to a "short" term (lives are getting longer, and medicine advancing) crunch - frankly a peak of highest costs for treatment for current and former smokers - during the time where state-paid healthcare related to tobacco use was in effect, but after those same users would not be buying the taxed item. If the $1 tax "pays it forward" for this peak, then smokers (or retailers or cigarette manufacturers, depending on what economic theory of who pays the tax floats your boat) would cover these expenses, and diminished revenue would not impact the state's ability to provide services.

A model of when health care costs will peak, coupled with models of cessasion costs, and the map of when the state needs funding when would be really interesting to see.

10:54 PM  
Anonymous Anonymous said...

Requiring labeling that includes a full ingredients list (along with an asterisk by each toxic ingredient), along with a complete list of every safer way to ingest nicotine would also be helpful.

2:19 AM  
Anonymous David W. Keelan said...

Freemarket,

You are speaking in terms of productivity. The State doesn't produce anything. They provide services.

What I am refering to is diminishing returns in terms of price elacticity.

You can not increase one variable of an equation ($1.00 increase in price) and expect the rest of the variables to remain constant. What will happen, eventually, will yield a result opposite the intended purpose of the variable change.

For illustration purposes only because I don't know what the State revenues are for tobacco products or the number of units sold in Maryland.

If I can sell 1000 TVs at $200.00 each and make a $100.00 profit on each TV then I can make $100,000.00 net profit. At what point will the price of a TV effect my net profit negatively?

For sake of discussion lets use a very simplistic model. Let us say that at every $100.00 increase in price I loose 10% of the market. With those variables in place then I could sell 31 TVs at $3,500.00 each and still make $105,071.00 (versus the $100,000 from above). Being in business I want to maximize my profits. From a retailer's point of view the ideal situation would be a price point of $1,000.00 per TV. I could sell 480 (48% of the addressable market) TVs and maximize my profit at $387,420.00 . Any price point above or below that would mean I would make less money than $387,420.00.

That is what I mean by diminishing returns.

Of course there are other variables such as competitors with a better TV, or selling TVs for less money. However, the State doesn't have to worry about that since they don't have competition. What the State has to worry about is making enough revenue to cover the programs and services it provides (no more and no less - Maryland's Constitution requires a balanced budget).

So at what point will an increase in tabacco taxes diminish revenue returns? We have to consider from a social and healtcare perspective that if I can reduce smoking by 52% of the addressable market and make up the diminishing returns in terms of the savings in healthcare costs and increases in productivity (this could mean many different things) then we have a potential tool (tax increase) to use. I would also want to know are increased productivity and healthcare savings short term or long term? If we won't see those savings for 25 eyars then I would have to pause.

Those savings would have to be significant enough and in the near term. Otherwise we have a big problem. We risk less revenue and other programs either suffer, or the budget is not balanced, or we see additional tax increases to make up for the shortfall in revenue in order to save those programs and balance the budget.

Again, I don't know those numbers. However, if I were considering a tax increase these are SOME of the variables I would consider.

11:22 AM  
Blogger Bruce Godfrey said...

The mere fact that the precise effect of a policy is not known, is not necessarily an argument against it, if the likely results are all (or mostly) "positive."

Example: we probably don't know the price elasticity effects of a dollar tax increase on cigarettes. We don't know for certain even that it will raise revenue on net. It probably should, but if some quit, some cut back, some bootleg, some never start or never get "hooked" who otherwise might, and some buy smokes out of state lawfully (e.g. in the District at work, etc.), it could theoretically reduce net revenue. If the tax were raised to $20/pack, it would certainly reduce revenue, as bootlegging would become the third state sport after jousting and lacrosse.

But if we know that consumption will drop, it might theoretically be worth it, if we value reduced consumption that strongly. Even if the revenue gain is modest and the drop in consumption is modest, might still be worth it.

David Keelan is right to focus on price elasticity, but it's not the policy factor in play. Unlike, say, in the case of books, where increased consumption may well be a good or at least not obviously "evil", public policy generally opposes smoking. So even if we don't know how much consumption will drop (and, net of "avoision" and bootlegging, how much revenue will come in), it may be worth doing if the range of different likely outcomes is pretty favorable "deck."

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