The Impact of the Increase of Cigarette Taxes - Term Paper Example

The impact of the increase of cigarette tas Table of Contents Cigarette tax definition 2 Federal cigar tax increase 2 Implication of the new tax in funding government project A lot of oppositions and comments have been heard and written about the increase of cigarette taxes. There are those who favor the imposition of this law, and there are those who do not. This study will focus on the implication of the increased cigarette tax to smokers, to the target beneficiary of the law and to the government. It will also give light on how the cigarette tax is implemented. Cigarette tax definition. First, let us examine what is a cigarette tax. Several tiers of taxes are imposed to cigarette. First is the manufacturers tax, next is the taxes paid by wholesalers and retailers. Then, a sales tax or use tax is imposed to a distributor for making a first sale in the state, called a state tax. A stamp affixed on the package shows that the state tax has been paid, and a person seen with untaxed package of cigarette may be subjected to penalty. (US Legal definitions) The federal cigarette tax increase Over and above these taxes, a new tax which has been implemented on April this year will increase the cost of packs of cigarettes. The increase will cost cigarette consumers an additional 62 cents a pack, raising the cost to $1.01. The tax will be felt by the estimated 45 million cigarette smokers in the US. Same tax increase will be imposed to small cigars, cigars, pipe and chewing tobacco. Next, we will find the implication the new tax increase to several sectors of the society. Implication of the new tax in funding a government project. The government imposed taxes to support funding for a project. Taxes are the way how government earns money to support infrastructure and development project. The chart below will show the impact of increase of taxes and the increase of the cost of cigarettes from 1970 to 2000. Trends in State and Federal Cigarette Tax and Retail Price—United States, 1970–2000 Source: CDC. Centers for Disease and Control Center The graph above presents the state and federal taxes showing modest increases between 1970 and 2000, while the cost per pack have increased sharply during the same period, and shown to be as follows (CDC) In 1970 Average cost per pack was $0.38 Average tax per pack was $0.18 Tax as a percentage of retail price (on the average) was 46.9% In 2000 Average cost per pack was $3.16 Average tax per pack was $0.76 Tax as a percentage of retail prices (on the average) was 23.4 Because of the tax increase, price per pack has also increased and now sells at $9 or sometimes $10 per pack. Every pack carries government fees in every state. For instance there is a $5.26 government fee for every cigarette pack in New York making it the most expensive place to smoke (Lee, Jennifer) Impact to Tax beneficiary The present increase in cigarette taxes will be used to finance the expansion of the State Children’s Health Insurance Program which was signed into a law in February 2009) and is described as The State Childrens Health Insurance Program (SCHIP) is a program administered by the United States Department of Health and Human Services that provides matching funds to states for health insurance to families with children. The program was designed with the intent to cover uninsured children in families with incomes that are modest but too high to qualify for Medicaid. (Wikipedia) Effect to manufacturers The cigar tax hike has been criticized widely by several authors and policy analysts. For instance, Patrick S. (2009) commented that revenues from the tax increase will not be sufficient to support the funding requirements of SCHP. Patrick also allayed fears on the negative impact of the tax increase to retailers and consumers. He cited in his report interviews done with several cigar manufacturers who said that tax increases can destroy the business of cigar retailers, manufacturers, and could also lead to unemployment. Taxes plus smoking ban of the government, Patrick said, is devastating the industry. The consumers can cut on their smoking habit in response to higher taxes, but it will have an effect on the industry’s sales. Manufacturer’s worry, according to this report, is no longer the competition, but the government who is slowly pushing them out of the business. Ultimately, it is the consumer who will bear the burden of cost as manufacturers will pass on the tax burden to smokers. The impact of the tax increase is already being felt by the US smokers. This was reported by BrianTimuthy of Gammett Washington Bureau who also said that manufacturers had also imposed a sales hike of cigar. Timuthy reported that earlier this month the manufacturer of Marlboro, Parliament and Virginia Slims, Philip Morris USA, increased prices by 71 cents a pack, 9 cents more than the federal tax increase. The maker of Camel, Kool and Salem cigarettes, R.J. Reynolds Tobacco, bumped wholesale prices up by 44 cents a pack and reduced discounting (Brian Tumulty), These cigarette companies comprise for more than 90% of all sales in the United States in 2006. In the report of CDC, sales of these companies amounted to billion dollars, and are shown below. Total reported company revenue for the five largest cigarette companies were as follows: Altria Group Inc. (parent company of Philip Morris USA), $10.4 billion (2005); Reynolds American Inc., $1.2 billion (2006); Loews Corporation (parent company of Carolina Group, which owns Lorillard), $2.49 billion (2006); Houchens Industries (parent company of Commonwealth Brands), $2.36 billion (2005); and Vector Group Ltd. (parent company of Liggett), $52.4 million (2005).4 Altria Group Inc. was ranked 20th, Loews 145th, and Reynolds American Inc. 280th on the Fortune 500 list of the largest corporations in the United States in 2006.(CDC) Impact to consumption The price tax hike will have direct effect to consumption and most likely reduce the figures reported in 2006 cigarette consumption in the U.S. The Center for Disease Control (CDC) reports cigarette consumption in the United States in 2006 which was estimated to be 371 billion cigarettes. The report said, Cigarettes account for approximately 91% of expenditures on all tobacco products in this country. Total United States expenditures on tobacco were estimated to be $88.7 billion in 2005, of which $82 billion were spent on cigarettes. CDC theorizes that as an effect of tax hike, there will be a significant decrease in the amount spent on cigarettes by about 4% on the overall consumption of the adolescents and young adults. CDC also said that the high cost of cigarette will reduce smoking High cost of cigarette can both be an advantage health wise, and economic wise. Brian Tumulty hy reported the comment of Irwin Redlener, president of the Childrens Health Fund in New York City, that adult smokers who are “economically on the edge” will find this a convenient excuse to quit smoking. Economic wise, price is a determinant for reduced consumption of smokers. The national survey done to 1,046 U.S. adult smokers conducted in March concluded that price has relation to cigarette consumption. According to this survey, smokers are more concerned with prices than health. Because of the rising cigarette cost, 56% of respondents in this survey said they will be smoking less and 76% have induced interests to quit smoking. (Smoking Cessation Center) Result of survey said that aside from price, the economy is also one of the big concerns that will change smoking habits. SCC cited the statement of Dr. Frank Chaloupka, professor of Economics at the University of Illinois at Chicago and an affiliate of the National Bureau of Economic Research who said that based on research, “smokers are more likely to quit when the price of cigarettes goes up. As a matter of challenge, Dr. Frank encouraged smokers to calculate the cost of smoking, and see how much savings they could have by quitting. And as an example, he calculated that a typical pack-a-day smoker would be spending an approximate amount of $2,000 a year on cigarettes. But he concludes that in the end, no matter how expensive cigarette becomes, quitting is difficult. Effects of cigarette tax on consumption – Asian experience The Effects of additional cigarette tax has also been evaluated in the Chinese economy wherein a study was done on the impact of additional tax. Results showed that given a price elasticity of demand by introducing 10% additional tax per pack, it was found out that the government tax revenue would twice exceed total losses in industry revenue, farmers income and local tax revenue. Study concluded that it would be a desirable public policy for the Chinese government to consider. (T W Hu and Z Mao) In another research study done in Taiwan, on the effect of large tax increase on cigarette consumption, result showed that smokers are relatively insensitive to cigarette price hike;. According to this study, a large increase in cigarette tax would reduce cigarette consumption but would also increase government’s tax revenue on cigarette and has likewise recommended pursuing tax hike policy. Two studies confirmed parallelism on impact of higher cigarette taxes with that of US. Chart below shows revenue growth as cigarette taxes go up, study done in South Africa from 1982-2008. Chart 2 shows government revenue increasing as excise tax is introduced. Chart 3 shows two scenarios of decline of smoking under two incidences of tax increase. Chart 2. source: www.tobaccoatlas.org According to Dr. Jeffrey E. Harris, in Chart 3, prevalence of smoking is dictated by prices of cigarettes and in long term trend, the increasing health concerns, smoking bans and the social acceptability of smoking. Discussions Highlight of this report showed that higher price of cigarette encourages smokers to quit, reduces smoking consumption, and prevents neophytes in smoking. It has also Discussions: Studies and articles reviewed show strong indication of positive and negative effects of additional cigarette taxes. It has pointed out that the low income earners and the youth are the categories of smokers who are most likely to quit due to economic reason of price. The real loser in any price increase is the smoking public who shoulders the cost passed on to them by manufacturers, distributors and retailers through the tiers of taxes imposed by the government. Positive growth of government revenue is shown as tax increases government income. Reduction in cigarette smoking will be good news to public health due to lessened smoking-related sickness. Studies done using elasticity of demand showed that smokers are not relatively affected by the price increase, but reduces consumption to reply to the tax hike policy. As a source of revenue, tax collections increase as higher taxes are imposed thereby providing source of revenue for project allotments. In our study, the tax hike in 2009 is intended to benefit the expansion of the State Children Insurance Program. But this is contradicted that the amount of collection will not be sufficient to support this program. In this context, will there be another round of cigar tax increase? Its repercussions will be a subject of another study. The cigarette tax is a conflicting policy that has to be weighed in terms of revenue generation, health promotion and social considerations. However, it is an economic tool that balances economic and social policy. In Asian experience, their policy favored tax increase, in the same way that this year, US has implemented cigar tax hike. References Centers for Disease and Control Center CDC. Trends in State and Federal Cigarette Tax and Retail Price—United States, 1970–2000. Smoking and Tobacco Use. 21 April 2009 Read More