The Effect of Cigarette Taxes

Governments levy excise taxes on cigarettes for two reasons: to raise revenues and to discourage smoking. Before the surgeon general's 1964 report on the ills of smoking,1 these taxes were justified nprmarily in terms of raising revenue. After the report, however, some form of regulation was needed to battle the newfound public health hazard. Although many other forms of regulation were attempted, excise taxes became an integral part of this new regulation.2 Discussions about tobacco taxes now typically focus on reducing tobacco consumption and improving public health.3 The logic of tobacco taxes is taken directly from economic theory. Since a rise in the tax rate increases the cost of cigarettes, the law of supply and demand suggests that fewer cigarettes will be consumed if taxes on them are raised. Kaiserman and Rogers, for example, report that since the early 1980s, tobacco consumption has been falling faster in Canada than in the United States as a result of Canada's higher tax rates.4 Perkurinen and Valtonen found that price was the single most important determinant of demand for tobacco products in Finland.s Several other studies have demonstrated the usefulness of excise taxes in reducing cigarette consumption in the United States.fr2 Our research extends these previous