Principles for Cigarette Taxation

Cigarette taxes are often the highest excise taxes in terms of their percentage share of the product price. The extent of the excess burden imposed by the tax will increase with the elasticity of demand, which is usually estimated to be between –0.4 and –1.0. Potential rationales for raising the cigarette tax other than as a revenue device include compensation for financial externalities to society, deterrence of irrational risk taking decisions, and prevention of mistaken addictive decisions. Whether such rationales are compelling depends, however, on the empirical context in different countries. Evidence reported for the United States and some other countries suggests that country-specific empirical assessments are needed to determine the validity of such rationales and the extent of the tax that may be warranted. This paper also suggests that cigarette taxes are not the most effective mechanisms for deterring youth smoking or limiting exposures to environmental tobacco smoke, as these are best addressed through more targeted regulatory policies. A cautionary note with respect to cigarette taxes is that they are often extremely regressive taxes that impose substantial burdens on the poor.