The cigarette tax is an excise tax, which is taxes on the sale of a particular commodity or service, and is one type of consumption tax. Other types of excise taxes include alcohol tax and gasoline tax. Excise taxes are the only form of consumption tax levied at the federal level (Kluger, 1996).
Cigarette taxes are used to fund federal programs such as economic stimulus plans, state funds, and also help to cut some of the budget deficit. There are conflicting beliefs regarding the motives of why excise taxes were originally imposed. Some consider this type of tax a “moral” tax, as well as a tax used to discourage people from engaging in “harmful behavior” by utilizing specific goods and services. Others consider this tax was created to provide expenditures which may be needed as a result of activities that are excised (Rabinoff, 2006).
The Effects of the Cigarette Tax on Consumption
The effect of federal excise tax increases on the consumption of tobacco depends on the extent to which the increased taxes are reflected in the prices of those items relative to the prices of other goods, and on how consumers respond to changes in the price (Slade, Hanauer, Glantz, Bero, Barnes, 1996).
Although excise tax revenues are collected from manufacturers, producers, or importers, the economic burden of an excise tax ultimately passes on to families. The distribution burden depends on how consumers adjust their purchases to changes in prices. Most studies of excise taxes commonly assume that these burdens are distributed among families in proportion to their purchases of the taxed goods (Tollison, 1988).
How consumer demand responds to price changes is measured by the price elasticity of demand, which is the ratio of the percentage change in the quantity demanded to the percentage change in price (Slade, Hanauer, Glantz, Bero, Barnes, 1996).
A positive of the cigarette tax is that, when the tax is raised on tobacco, it may reduce the demand for cigarettes and...