June 14, 2009|Nicholas Goldberg |
Nicholas Goldberg is deputy editor of the editorial pages. Raising taxes in California these days is extraordinarily difficult. In fact, in their effort to eliminate a $24-billion budget shortfall, the state's politicians are discussing dismantling California's main welfare program, eliminating the health insurance program for poor children and decimating education without any apparent debate on raising the income or sales tax.
One of the few state taxes that politicians have talked about raising is the tobacco tax. California's is currently set at 87 cents a pack (and hasn't been raised in a decade); this year, the Legislature will consider raising it to $2.97 a pack, which would bring the cost of a pack of cigarettes to more than $7.00. Sponsors of the bill estimate that the tax hike would raise about $2 billion.
How does the tobacco tax work? Who does it help and who does it harm? Below, some questions and answers to help frame the debate.
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What's the chief argument for hiking the tobacco tax?
That it's a good tax. Business taxes have negative consequences: They drive companies and jobs out of the region. High income taxes make the state a less desirable place to live. Sales taxes can stifle commerce.
But tobacco taxes are different. They raise revenues and simultaneously serve the public good by reducing smoking, at least in theory. That's not insignificant in a state where about 13.3% of residents smoke, where there are more than 30,000 smoking-related deaths each year, and annual smoking-related costs are estimated at more than $15 billion.
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Can raising taxes really change behavior?
Yes. The tobacco tax is based on one of the most fundamental rules of microeconomics -- the law of demand -- which says that all else being equal, the more you raise the price of a product, the more demand for it will drop. Conversely, if you reduce the price, more people will buy, use or, in this case, smoke the product.
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Taxing tobacco in order to discourage its use is a pretty clever idea. Who came up with it? Milton Friedman? Paul Krugman?
Actually, it goes back a bit further.
When Columbus first brought tobacco back from the New World, rulers were not quite sure what to do. In the 16th century, Murad IV, the sultan of Turkey, decided that tobacco was offensive, and he tried to control it the old-fashioned way, by declaring its sale or use punishable by death.
That wasn't a great success. In 1604, James I, king of England, tried another approach. Calling smoking "a custom loathsome to the eye, hateful to the nose, harmful to the brain, dangerous to the lungs, and in the black stinking fume thereof, nearest resembling the horrible Stygian smoke of the pit that is bottomless," he imposed a 400% tariff on tobacco.
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What does "Stygian" mean?
Dark, gloomy, hellish -- like the river Styx. I had to look it up too.
But here's the punch line: King James' tariff had only minimal effects on consumption. Worse yet, according to some accounts, the enormous tax revenues that flowed in apparently converted James from an opponent of smoking to a supporter.
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And today? Do many places have tobacco taxes?
Of course. Smoking is unpopular, and smokers are politically weak, so why not?
The United States instituted its first federal excise tax on tobacco in 1865 -- 2 cents per 20 cigarettes -- to help pay for the Civil War. In the 118 years that followed, it went up only slightly, to 8 cents a pack. But since 1983, the federal tax has been hiked repeatedly and now stands at $1.01 per pack.
Meanwhile, all 50 states have instituted tobacco taxes as well. They range from as low as 7 cents a pack in the tobacco-growing state of South Carolina to $2.75 a pack in New York, according to the Centers for Disease Control and Prevention. At 87 cents a pack, California's tobacco tax is well below the national average of $1.20 a pack.
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So this is a no-brainer, right? Raise the tax. Solve the budget crisis. End smoking. It's that easy.
It's not quite that simple.
For one thing, there's a fundamental conflict in the tobacco tax: The more effective it is at discouraging smoking, the less revenue it brings in. Theoretically, if prices get pushed up high enough, so many people will stop smoking that revenues would decrease, eventually to zero if everyone were to quit.
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Is it possible to predict what the effect of a price hike will be?
Surprisingly, it is.
What's at work here is something economists call the "price elasticity of demand," which measures how consumers respond to a change in price. Demand for a product, they say, is highly "elastic" if a slight change in price leads to a sharp change in consumption. If, by contrast, people are willing to continue paying for the product as the price goes up, the product is "inelastic."
Demand for tobacco is relatively inelastic. Not because it is a necessary product but because it's addictive. A 20-year, two-pack-a-day smoker is not all that likely to quit just because the price goes up by a dollar.
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So people keep smoking no matter what?
