California - it's been a decade since the cigarette tax was increased..

June 18, 2009 - California - in their effort to eliminate a $24-billion budget shortfall, the state’s politicians are discussing dismantling California’s main welfare program, eliminating the health insurance program for poor children and decimating education without any apparent debate on raising the income or sales tax.

One of the few state taxes that politicians have talked about raising is the tobacco tax. California’s is currently set at 87 cents a pack (and hasn’t been raised in a decade); this year, the Legislature will consider raising it to $2.97 a pack, which would bring the cost of a pack of cigarettes to more than $7. Sponsors of the bill estimate that the tax hike would raise about $2 billion.

The tobacco tax is a good tax. They raise revenues and simultaneously serve the public good by reducing smoking, at least in theory. That’s not insignificant in a state where about 13.3 percent of residents smoke, where there are more than 30,000 smoking-related deaths each year, and annual smoking-related costs are estimated at more than $15 billion.

Raising tobacco taxes can change behavior. The tobacco tax is based on one of the most fundamental rules of microeconomics — the law of demand — which says that all else being equal, the more you raise the price of a product, the more demand for it will drop. Conversely, if you reduce the price, more people will buy, use or, in this case, smoke the product.

The United States instituted its first federal excise tax on tobacco in 1865 — 2 cents per 20 cigarettes — to help pay for the Civil War. In the 118 years that followed, it went up only slightly, to 8 cents a pack. But since 1983, the federal tax has been hiked repeatedly and now stands at $1.01 per pack.

More information can be found in reference on How does the tobacco tax work? Who does it help and who does it harm?...

Reference: Where there’s smoke there are taxes, NICHOLAS GOLDBERG, pressdemocrat.com, 6/17/2009.

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