Tobacco Tax Policy in West Virginia

We consider the likely revenue effect of an increase in the cigarette excise tax rate in West Virginia. We begin with a consideration of the existing literature on how US state cigarette excise tax policy affects cigarette consumption and cross-border cigarette shopping. Second, we examine 80 cigarette excise tax increases that have occurred in the US since 2000. There we find a wide range of responses, but declines in cigarette purchases associated with any increase in the state cigarette excise tax rate typically fall within a range of 10 to 30 percent. We close with the estimation of a full regression model that explains cigarette purchases as a function of the state cigarette excise tax rate, which controls for relevant factors in order to isolate the specific effect of state tax policy, abstracting from federal cigarette excise tax policy and the broader decline in smoking in the nation. We use data from the 48 contiguous US states for the years 2000 through 2014. The actual number of cigarette packs purchased in West Virginia in FY 2015 was approximately 173 million. The results from our full model indicate that, with a $1 increase in the cigarette excise tax rate, West Virginia would be expected to collect an additional $101 million in cigarette excise tax revenue under our most pessimistic scenario, or $134 million under our most likely scenario. This $134 million estimate reflects an anticipated 14 percent decline in cigarette purchases attributable to the higher tax rate, to around 148 million packs purchased annually. Because the cigarette tax is levied at the wholesale level, we must also consider the net effect of this change on the consumer sales tax. Netting the effects of reduced pack sales against the higher retail cigarette prices resulting from the excise tax increase indicates a modest increase 1 The authors thank Fred Lewis for helpful comments and suggestions.