Cigarette taxes in the United States

Smokers as a percentage of the population for the United States as compared with the Netherlands, Norway, Japan, and Finland.

In the United States cigarettes are taxed at both the federal and state levels, in addition to any state and local sales taxes and local cigarette-specific taxes. Cigarette taxation has appeared throughout American history and is still a contested issue today.

History

Although cigarettes were not popular in the United States until the mid-19th century, the federal government still attempted to implement a tax on tobacco products such as snuff early on in its history. In 1794, secretary of the treasury Alexander Hamilton introduced the first ever federal excise tax on tobacco products. Hamilton’s original proposal passed after major modifications, only to be repealed shortly thereafter with an insignificant effect on the federal budget. Even though Hamilton’s tax on tobacco failed, tobacco taxation continued to play an important role in American history.

On July 1, 1862, the United States Congress passed excise taxes on many items including tobacco. This occurred as a result of the Union’s increasing debt during the American Civil War and the Federal government’s need for additional revenue. After the war, many of these excise taxes were repealed but the tax on tobacco remained. In fact, by 1868 the Government’s main source of income came from these lingering tobacco taxes.

Despite the excise tax of the Federal government, states did not ratify a tobacco excise tax until well into the 20th century. In 1921, Iowa became the first state to pass a tobacco excise tax at the state level in addition to the federal tax. Other states quickly followed suit, and by 1950, 40 states and Washington D.C. enacted taxes on cigarette sales.

As of 1969, all U.S. states, the District of Columbia and the territories have cigarette taxes. In addition, several cities such as Chicago and New York City have implemented their own citywide cigarette tax. New York City has a citywide tax of $1.50, making the combined state and local rate $5.85, the highest in the nation. The lowest rate in the nation is in Missouri, at 17 cents, where the state's electorate voted in 2002, 2006, and 2012 to keep it that way.

Under the Obama Administration

On February 4, 2009, the Children's Health Insurance Program Reauthorization Act of 2009 was signed into law, which raised the federal tax rate for cigarettes on April 1, 2009 from $0.39 per pack to $1.01 per pack. The purpose of the State Children’s Health Insurance Program (SCHIP) is to provide aid for impoverished children. With the increased revenue from tobacco taxes SCHIP can now afford to include families with up to three times the federal poverty level as well as children from high-income families in New York and New Jersey. SCHIP will also be able to cover dental benefits and treatment of mental illnesses where it previously could not. In addition to providing these services for U.S. citizens, SCHIP is also expanded to cover immigrant children and immigrant pregnant women.

President Barack Obama has received both criticism and support for signing it.

One of the biggest critiques of the passing of this bill comes from economists who believe that an increase in the federal cigarette tax will lead to decreased funding for state programs that rely on their own state cigarette taxes. According to Nobel prize winning economist Gary Becker, who has studied the long-run price elasticity of cigarettes, the tax increase as a result of the Children’s Health Insurance Program Reauthorization Act increases the price of cigarettes 13.3% which ultimately means a 10.6% decrease in unit sales. The National Tax Foundation calculates these numbers to determine a predicted $1 billion loss for states. Another argument against this bill claims it to be regressive, holding that the tax increase unfairly targets the poor because according to the Centers for Disease Control and Prevention (CDC) more than half of all smokers are low income. The CDC also notes that, "However, because low-income groups are more responsive to price increases, increasing the real price of cigarettes can reduce cigarette consumption among low-income smokers by a greater percentage than among higher-income smokers, and thereby diminish socioeconomic smoking disparities. Further, lower-income communities also suffer from tobacco-related illnesses at a disproportionately higher rater than their higher-income counterparts.

In a study conducted on behalf of the New York State Department of Health, it revealed that low-income smokers (those in households making under $30,000), spent an average of 23.6% of their annual household income on cigarettes, compared to 2.2% for smokers in households making over $60,000.

Effects on smoking rates

One of the reasons for the support of increased cigarette taxes among public health officials is that many studies show that this leads to a decrease in smoking rates. The relationship between smoking rates and cigarette taxes follows the property of elasticity; the greater the amount of the tax increase, the fewer cigarettes that are bought and consumed. This is especially prevalent amongst teenagers. For every ten percent increase in the price of a pack of cigarettes, youth smoking rates overall drop about seven percent. This rate is also true amongst minorities and low income population smokers. The rates of calls to quitting hot-lines are directly related to cigarette tax hikes. When Wisconsin raised its state cigarette tax to $1.00 per pack, the hot-line received a record of 20,000 calls in a two month time period versus its typical 9,000 calls annually.

An analysis of smoking and cigarette tax rates in 1955 through 1964, prior to the Surgeon General’s first report and general antismoking sentiment, shows the same relationship between tax increases and declining smoking rates that are prevalent today, suggesting that popular attitudes towards smoking are not a confounding factor.

Proportion of taxes in cigarette prices

While the price of cigarettes has continuously increased since 1965, the percentage of that price going towards taxes is now half of what it was then. While tobacco companies complain about the $1.01 cigarette tax, Phillip Morris, Reynolds American, and Lorillard have all increased their prices by almost $1.00 per pack on their own. Phillip Morris currently lists all taxes, including federal, state, local, and sales taxes, as 56.6% of the total cost of a pack of cigarettes.

State cigarette tax rates

The following table lists American state and territory tax rates (as of January 2012):

Taxes on the purchase of packs of cigarettes in each state
States are shaded on a continuous color scale from $0 to $6 where

  No Excise Tax Per Pack

  $2 Excise Tax Per Pack

  $4 Excise Tax Per Pack

  $6 Excise Tax Per Pack

Excise Tax Per Pack (USD)	State/Territory
0.425	Alabama
2.00	Alaska
2.00	Arizona
1.15	Arkansas
0.87	California
0.84	Colorado
3.40	Connecticut
1.60	Delaware
1.339	Florida
0.37	Georgia
3.20	Hawaii
0.57	Idaho
1.98	Illinois
0.995	Indiana
1.36	Iowa
0.79	Kansas
0.60	Kentucky
0.36	Louisiana
2.00	Maine
2.00	Maryland
2.51	Massachusetts
2.00	Michigan
1.60	Minnesota
0.68	Mississippi
0.17	Missouri
1.70	Montana
0.64	Nebraska
0.80	Nevada
1.68	New Hampshire
2.70	New Jersey
1.66	New Mexico
4.35	New York
0.45	North Carolina
0.44	North Dakota
1.25	Ohio
1.03	Oklahoma
1.18	Oregon
1.60	Pennsylvania
3.46	Rhode Island
0.57	South Carolina
1.53	South Dakota
0.62	Tennessee
1.41	Texas
1.70	Utah
2.62	Vermont
0.30	Virginia
3.025	Washington
0.55	West Virginia
2.52	Wisconsin
0.60	Wyoming
2.50	Dist. of Columbia
1.75	Northern Marianas Islands
2.23	Puerto Rico
3.00	Guam
2.50	American Samoa
1.78	U.S. Virgin Islands

• The federal excise tax on cigarettes is $1.01, which is not included in the rates shown above.
• Several municipalities, such as New York City, Chicago, and Anchorage also have a cigarette tax, which is not included in any of the rates shown above.
• Most states charge a sales tax on top of the retail price and the excise taxes. A few municipalities levy a local sales tax in addition to the state tax. None of the rates shown above take sales taxes into account.

Non-cigarette tobacco taxes

Taxes on smokeless (chewing) tobacco, as well as (and often concurrent with) snuff, cigars and pipe tobacco, are also common in the United States. Forty-nine states and the District of Columbia have such a non-cigarette tax(es), Pennsylvania being the sole exception, having no smokeless or cigar tax at all (though it considers small cigars to be cigarettes for taxation purposes). Of the 49 states that do impose in this category, Florida does not tax cigars, though all other tobacco products are taxed. The U.S. federal government charges different non-cigarette excise taxes, according to the following 6 categories: snuff, chewing tobacco, pipe tobacco, roll-your-own, large cigars, and small cigars. Cigarette papers and tubes are also taxed.

See also

• Cigarette Taxation
• Tobacco Smoking

US tax system:

• Excise tax in the United States