In addition to having an impact on public health impact, increases in cigarette excise taxes have a positive impact on revenues, despite reductions in the sale of cigarettes and any losses due to increased tax evasion and avoidance (Farrelly et al., 2003; Lindblom and McMahon, 2006; Stehr, 2005; Merriman et al., 2000; Hyland et al., 2006; Chaloupka et al., in press).
Cigarette taxes account for only a portion of cigarette prices (less than half, on average), and researchers have found that although increased taxes lead to significant reductions in the number of cigarettes sold, revenues increase because of the higher tax on remaining sales. In fact, a recent analysis of state cigarette excise tax increases and revenues suggests that every state that raised its cigarette tax by ten cents or more between 1990 and 2000 saw increases in the revenues from these taxes, despite the reductions in cigarette sales caused by the tax increase (Farrelly et al., 2003).
In contrast, states that allowed inflation to erode the value of their cigarette taxes saw a decline in the inflation-adjusted value of their cigarette tax revenues. A second study, of tax increases between January 2002 and July 2003, similarly reported that every increase led to an increase in cigarette tax revenues (Lindblom and McMahon, 2006).
Smokers try to avoid tax increases by purchasing cigarettes on-line or in jurisdictions with lower taxes or no taxes at all. These efforts partially offset the public health benefits of cigarette tax increases, as do the more organized efforts to smuggle cigarettes. Recent estimates suggest that these tax avoidance and evasion activities were a factor in one-eighth or more of total cigarette consumption in the early 2000s (Stehr, 2005). Even in the presence of these activities, however, increases in cigarette taxes are effective in reducing cigarette smoking, improving public health, and generating new revenues (Farrelly et al., 2003; Merriman et al., 2000). Among the other findings:
- Heavier smokers and those with higher incomes are more likely to engage in tax avoidance than are other smokers, while smokers who purchase low-tax or untaxed cigarettes are less likely to try to quit smoking (Hyland et al., 2006).
- States have taken a number of actions to address tax avoidance and evasion over the last few years, and appear to be making progress (Chaloupka et al., in press).