The Possible Benefit from Tobacco - Term Paper Example

The Possible Benefit from Tobacco INTRODUCTION As of 2006, revenue from Cigarette taxes amounted to as much as $14,974,713 billion which is a sizeable source of revenue for the economy ( U.S Census Bureau, Vol.4 2008). However, last 2007, the biggest federal tax hike was enacted that caused an uproar from politicians, economist, public policy makers, and the smoking public. The result of the increased tax resulted to a decline in smoking of which public health officials claim as good for the majority of the population. On the contrary, Thomas Briant, executive director of the National Association of Tobacco Outlets asserts that “"using taxes to legislate use of a legal product is not good public policy”.( cited in USAToday 2007 ). He believes that increased taxes would hurt the revenue of each state. In order to understand the implications of the increased taxation , the paper will discuss the importance of cigarette taxes to the economy of the United States and discuss the purpose of taxation as a social policy. Tobacco Taxes : Historical Background In order to have a clear understanding of the importance of cigarette taxes, it is appropriate to give a historical background of the object- cigarettes. Historically, tobacco became popular in the United States in 17th century which was often associated with slavery since tobacco plantations required massive manpower. However, when America started trading with other colonies after the American Revolution, tobacco in the form of cigarettes became popular. The origin of cigarette smoking can be traced to Western Europe. The cigarette was actually smoked by members of the lower class population in Andalusia which was adapted by the French during their conquests there. Later during the Victorian period, the British adopted tobacco to suit their taste and style but in the form of “dainty looking cigarette” which can used by the ladies (Burns 132 ). In the United States, Maryland and Virginia competed heavily in tobacco farming resulting to the establishment of two different types of auction system for loose-leaf. This caused tremendous pressure to the government leading to the enactment of the Tobacco Inspection Act that directs the Secretary of Agriculture to impose controls on the tobacco Industry ( McGrew ). In addition to this, McGrew asserts that the government imposed regulation since “the tobacco industry provided more than $4.8 billion in taxes in 1971” (USDA, Tobacco Situation, 1971b: 44). Strictly speaking, the first federal excise tax on tobacco was included in the Alexander Hamilton’s tax package of 1794 which was restricted by Congress after a few debates. Later on, the interest to gain revenue from tobacco grew during the Civil war. In July 1, 1862, the first ad valorem tax for cigars was enforced, followed by tax increase in 1865, 1866 and 1875. Amazingly, in 1880, revenues from tobacco contributed to 31% of total federal tax receipts in which 50% of these collections came from smoking and using tobacco ( Heimann, 1960: 156). The revenue generated by tobacco products have risen drastically annually that by 1970, the Tobacco Tax Council reported a staggering revenue of no less than $2 billion dollars ( Tobacco tax Council 1970:5 ). The government finds collection of excise taxes easy and very lucrative ion both federal and state level. Moreover, it was justifiable to collect taxes since tobacco is viewed as a luxury, not a necessity. The renowned economist, Adam Smith ( 1776 ) asserts that: Sugar, rum, and tobacco, are commodities which are nowhere necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation… (Smith, 1776, Book V, Chapter III, pp. 474–476 ) The first state to benefit from directly taxing cigarettes is Iowa (1921) which was followed by 11 more states 10 years later (Robert, 1949: 256). By 1950s, even the District of Columbia along with 40 states imposed taxes. The state of Louisiana recorded the highest tax levy ( 8% ) for a pack of cigarettes among the states. In 1966, Oregon followed suit in the imposition of taxes on cigarettes which was followed by North Carolina in 1969. ). During the 60s, many local governments even added further excise taxes on the state taxes which contributed heavily to the state’s revenue. No wonder, the federal and state governments treat tobacco as a “gold mine” since it contributes to no less than $14 billion dollars annually in the form of excise tax. MOTIVES IN TAXATION For centuries, countries around the world find tobacco as a good source of revenue since aside from being relatively inelastic, it is not a necessity but widely consumed by the public. The main motivator for tobacco taxation before was simply to generate revenue for the government. Though this maybe true and valid, there have been health issues that are linked with the use of tobacco which are now used as justification for the increased taxation of these products. Since 1990, 42 states have increased their cigarette tax rates. In a report commissioned by the Michigan Department of Treasury, the editors cited some reasons for increasing cigarette taxes , among those: 1. The taxation of cigarettes faces less political opposition because it does not affect the majority of taxpayers. 2. The cigarette tax is relatively easy to levy and administer. The system is already in place and few exclusions or deductions are permitted. However, higher tax rates and the wide variance in tax rates across the country create more lucrative opportunities for tax avoidance and evasion, potentially leading to increased collection costs. 3. Higher cigarette taxes are thought to decrease future health care costs to taxpayers. The higher price should discourage smoking and reduce future state costs for medical treatments associated with smoking. 4. The demand for cigarettes is inelastic. That means that cigarette smokers only reduce consumption by a small amount when the price of cigarettes increases. The overall distribution of economic activity is distorted less when excise tax rates (like the cigarette tax) are higher on products that are more inelastic. 5. Some proponents of higher cigarette taxes claim that higher taxation compels smokers to take into account at least some of the effects their smoking may have on others. Environmental tobacco smoke (ETS) has adverse effects on nonsmokers, including the adverse health effects of secondhand smoke. Higher tax rates may cause smokers to recognize monetarily the costs imposed on society through ETS. 6. Higher cigarette taxes may reduce teenage smoking. Studies have found that younger smokers are the most sensitive to price increases, especially older teens. Higher prices that result from increased cigarette taxes may prevent adolescents from starting to smoke or induce quitting at a younger age. ( Roberts and Darragh : p.2-3) On close observation, the first two reasons are socio-political in nature and states reinstates the main reason for taxation : revenue generation. The remaining reasons are related to the justification of the health costs associated with smoking, smoker or non-smoker. These justifications acts as a balance on the government’s drive to generate revenues from cigarettes since these products have negative externalities. In a study made on different countries regarding the taxation of tobacco products, it was observed that “ several US states (most notably California, Massachusetts, Arizona, and Oregon) earmark a portion of tobacco taxes for tobacco-related education, counter-advertising, and other tobacco-control activities”( Chaloupka, Hu ,Warner et.al : 33 ). Similarly, the last reason is also related to health concerns since increased taxation is being used as a social policy that reduce the incidence of teen-age smoking. Analyzing these justifications, increase in taxation then is not merely an economic move but a social one as well. Increased Cigarette Taxation as a Social Policy Mankind has normal adversity towards taxes since people generally dislike their income being reduced. However, paying taxes is inevitable since taxes serve as the lifeblood of the government. When it comes to cigarettes, taxation is an acceptable notion since the act of smoking is discouraged, if not prevented. There have been already many research proving that smoking kills since it is associated with lung cancer as well as cardiovascular diseases. Smoking affects the general society since even non-smokers are affected by second-hand smoke. The Centers for Disease Control and Prevention (CDC) reported that direct medical expenditures worth $75.5 billion in 1998 can be attributed to smoking ( cited in Darragh,S .p.38 ). The social burden is also shared even by non-smokers since they are obliged to pay higher premiums for health and life insurance. Likewise , non-smokers share the burden with smokers especially if they are family members. For example, a smoker’s job productivity is reduced due to health complaints which translates to absenteeism. In an article published by the New England Journal of Medicine in 1994, it was reported that smokers visit health centers around 6 times a year and are prone to absences for more than 6.5 days than non-smoking workers (MacKenzie, et.al :38 ). The government also bears this cost since provision of health services to the public use taxpayer’s money. The irony is that the government must spend for the health services of a smoker who in turn contribute less taxes to the government due to reduced income. A low tax revenue impairs the budget of the government to spend for social services that its citizens need. When this happens, the government must increase taxes even on non-tobacco products so it would not have a budget deficit. Although it can be argued that increased taxes on cigarettes can compensate for such loss, the issue of budget is prioritization. The same money spent for sick smokers can be appropriated properly to other groups like senior citizens who badly need medical care. The increased taxation as a social policy also benefits the future generation. Looking back at the sixth justification why states raised tobacco taxes, it shows that governments of these states are disturbed by the effect of tobacco smoking to the young generation. In an article in Tobacco Control, Warner argued that : A group of leading health economists who have studied the economics of tobacco use recently concluded that that protecting children from a future of nicotine addiction, with its associated health risks, was the most compelling reason favoring increased tobacco taxation (Warner et Al Vol.9:I.: 78-82 ). The health economists viewed the increased taxes as tool to correct the wrong perceptions of the young people about the addictive nature of tobacco. Furthermore, the increased taxes as a tool will counteract the projection of mass media that the consumption of tobacco does not have serious health implications. The tobacco companies project tobacco consumption as a lifestyle which definitely influences the youth who needs a “status quo” object that can give them identity. Commonly, the advertisement of these tobacco companies are aimed towards young people. Clearly, the government is using the increase taxation as a social policy that will not only discourage smokers but also protect the interests of the young generation by ensuring them a healthy lifestyle devoid of nicotine addiction. Implications of Increased Taxation to Economy In the beginning of this paper, it was cited in a news report that the increased taxes reduced tobacco consumption. Moreover, Mr.Thomas Briant, the executive director of the National Association of Tobacco Outlets expressed his concern about the effect of the said increase to state revenue. Indeed, Mr. Briant has a cause for concern since even if tobacco’s demand is considered inelastic, certain research proves that smokers are affected by the increase in prices. Studies made by World bank in Canada revealed that “ tax increases in Canada between 1982 and 1992 led to a steep increase in the real price of cigarettes, and consumption fell substantially” (The World Bank Group : Chapter 4 ). The studies also further reported that the increased taxes prevented people from even starting the habit which is beneficial to the general population. Nonetheless, it is still not sufficient evidence to prove that the macro economy would be adversely affected by the increased taxation. It only argues that increased taxation diminishes consumption but does not altogether eliminated the demand for tobacco products. A counter argument by Sunley ( 1988 ) presented in his working paper for the IMF asserts that even an increase of 10% in taxes would result to at least a 7% increase in tax revenues that would altogether offset the equation of reduced consumption. Also, studies made on elasticity shows that only young people are price sensitive to the increase since they do not have yet the disposable income to cope up with the consumption. Therefore, developed countries such as the U.S. would still maintain its demand for tobacco products. In brief, the elasticity to tax increase is only short-run response. In the end, the revenues would still be sizeable. CONCLUSION The revenue generated from tobacco products as discussed historically shows that the federal and local states counted or even depended on this revenue and considered it as a main source of income. However, increasing health concerns such as decreased workers productivity and social concern to protect the young generation from developing nicotine addiction has altered the objectives toward increased taxation of tobacco products. Nevertheless, the effect of increased taxation modified the behavior of the population while altogether maintained a sizeable source of revenue for the government. REFERENCES Burns, Eric. The Smoke of the Gods: A Social History of Tobacco .Temple University Press.2006. Cauchon, Dennis. “Smoking declines as taxes increase”. USAToday. Updated 8/10/2007 . Accessed April 15,2009, Chaloupka Frank J., Teh-wei Hu, Kenneth E. Warner, Rowena Jacobs, and Ayda Yurekli The Taxation of Tobacco products. Accessed on April13,2009, . Darragh, Scott. Michigan’s Cigarette and Tobacco Taxes 2003. Tax Analysis Division. Bureau of Tax and Economic Policy Michigan Department of Treasury. Heimann, R. K. Tobacco and Americans.McGraw-Hill Book Company.1960. MacKenzie, T.D., C.E. Bartecchi, and R.W. Schrier. “The Human Costs of Tobacco Use.” The NewEngland Journal of Medicine, Vol. 330:14 (1994): 979. Robert, J. C. The Story of Tobacco. Chapel Hill: University of North Carolina Press, 1949. Smith,A. An Inquiry Into the Nature and Causes of the Wealth of Nations (ed. E. Canaan). 1776. State & Local Government Finance Data Query System. The Urban Institute-Brookings Institution Tax Policy Center. Data from U.S. Census Bureau, Annual Survey of State and Local Government Finances, Government Finances, Volume 4, and Census of Governments (Years). Accessed on April15,2009, Sunley, E.M.. The Design and Administration of Alcohol, Tobacco and Petroleum Excises: a Guide for Developing and Transition Countries. 1998,Working Paper, Fiscal Affairs Department, International Monetary Fund. "Tobacco Situation," Economic Research Service, TS-137, (1971) 7: 39-44. Tobacco Tax Council. "The Tax Burden on Tobacco," 1970, iii-iv, v, 5. Warner, Kenneth E. “The Economics of Tobacco: Myths and Realities.” Tobacco Control, 9.1. (2000) 1: 78 – 89. WorldBank Report. Economics of Tobacco. Chapter 4., 2008 Accessed April 5,2009, OUTLINE I. Introduction II. Tobacco taxes: Historical Background III. Motives in Taxation a. Increased Taxation as a Source of Revenue b. Increased Taxation as a Social Policy IV. Implication of Increased Taxation to Economy V. Conclusion Read More