Increase the Excise Tax on Tobacco Products by 50 Percent
CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.
|Billions of Dollars||2019||2020||2021||2022||2023||2024||2025||2026||2027||2028||2019-
|Change in Mandatory Outlays||*||*||-0.1||-0.1||-0.1||-0.1||-0.1||-0.1||-0.1||-0.1||-0.3||-0.9|
|Change in Revenues||3.5||4.6||4.3||4.3||4.2||4.2||4.1||4.0||3.9||3.9||20.9||41.0|
|Decrease (-) in the Deficit||-3.5||-4.6||-4.4||-4.4||-4.3||-4.3||-4.2||-4.1||-4.0||-4.0||-21.2||-41.9|
Both the federal government and state governments tax tobacco products. In 2018, the federal excise tax on cigarettes was just under $1.01 per pack, and the average state excise tax on cigarettes was $1.75 per pack. In addition, settlements that the major tobacco manufacturers reached with state attorneys general in 1998 require the manufacturers to pay about 60 cents per pack in fees. Together, those federal and state taxes and fees total $3.36 per pack of cigarettes, on average. Other tobacco products are also taxed, including cigars, pipe tobacco, and roll-your-own tobacco. Large cigars are taxed at 52.75 percent of the manufacturer's sales price, with a maximum tax of 40.26 cents per cigar. Pipe and roll-your-own tobacco are taxed at $2.83 and $24.78 per pound, respectively.
Collections from federal taxes on tobacco products totaled $14 billion in 2017. It is estimated that about 16 percent of adults are currently smokers, but the Congressional Budget Office projects that tobacco consumption will decline over the next decade, causing receipts to fall by about 2 percent per year over that time.
This option would make several changes to the federal excise taxes on tobacco products. It would raise the tax on pipe tobacco to equal that for roll-your-own tobacco—from $2.83 to $24.78 per pound. It would also set a minimum tax rate on large cigars equal to the tax rate on cigarettes. In addition to those changes, the option would raise the federal excise tax on all tobacco products by 50 percent beginning in 2019. As a result, the federal tax on cigarettes would increase to about $1.51 per pack in that year.
Effects on the Budget
CBO and the staff of the Joint Committee on Taxation estimate that the option would reduce deficits by $42 billion from 2019 to 2028: Revenues would rise by $41 billion, and outlays would decline by almost $1 billion. The decrease in outlays would mainly result from reduced spending for Medicaid and Medicare.
The higher excise tax would reduce taxable business and individual income. The resulting reduction in income and payroll tax receipts would partially offset the increase in excise taxes. The estimates for the option reflect that income and payroll tax offset.
Increasing the tax on tobacco would contribute to a decline in smoking rates, which would reduce the amount of excise taxes raised by the option. The estimate incorporates that reduction. The decline in smoking rates would also lead to improvements in health and an increase in longevity. Although the budgetary impact of raising the excise tax on cigarettes would stem largely from the additional revenues generated by the tax (net of the reductions in income and payroll taxes noted above), changes in health and longevity also would affect federal outlays and revenues.
Improvements in the health status of the population would reduce the federal government's per-beneficiary spending for health care programs, which would initially reduce outlays for those programs. But that reduction in outlays would erode over time because of the increase in longevity. A larger elderly population would place greater demands on federal health care and retirement programs in the future. The effect of greater longevity on federal spending would eventually outweigh the effect of lower health care spending per beneficiary, and federal outlays would be higher after that than they are under current law.
The improvements in health would also raise revenues by reducing people's premiums for private health insurance. That increase in revenues would occur mainly because the reduction in employers' contributions to health insurance premiums, which are not subject to income or payroll taxes, would ultimately be passed on to workers in the form of higher taxable compensation. That increase in taxable compensation would increase income and payroll tax revenues.
The estimate for this option is uncertain because both CBO's underlying projection of tobacco consumption and the estimated response to the change in the tax rate are uncertain. The estimate of how taxpayers would respond to the increase in tobacco taxes is based on observed past responses to changes in the tax rate, which might differ from responses to the changes considered here.
One argument for raising the excise tax on tobacco is that tobacco consumers may underestimate the addictive power of nicotine and the harm that smoking causes. Teenagers in particular may not have the perspective necessary to evaluate the long-term effects of smoking. Extensive research shows that smoking causes a variety of diseases, including many types of cancer, cardiovascular diseases, and respiratory illnesses. Tobacco use is considered to be the largest preventable cause of early death in the United States. Raising the tax on tobacco would reduce the number of smokers, thereby reducing the damage that people would do to their long-term health. CBO estimates that a 50 percent increase in the excise tax would cause smoking rates to fall by roughly 3 percent, with younger smokers being especially responsive to higher cigarette prices. Smoking rates would remain lower in the future than they are expected to be under current law because a smaller share of future generations would take up smoking. However, many other choices that people make—for example, to consume certain types of food or engage in risky sports—also can lead to health damage, and those activities are not taxed. Also, studies on how people view the risks of smoking have yielded inconsistent results, with some research concluding that people underestimate those risks and other research finding the opposite.
Another argument for raising the excise tax on tobacco products is that smokers impose costs on nonsmokers that are not reflected in the pretax cost of tobacco. Those costs, which are known as external costs, include the damaging effects that tobacco smoke has on the health of nonsmokers and the higher health insurance premiums and greater out-of-pocket expenses that nonsmokers incur as a result. The higher tax would lead to improvements in health not only among smokers themselves but also among nonsmokers, who would no longer be exposed to secondhand smoke. Those improvements in health would, in turn, increase the longevity of nonsmokers as well as smokers. However, other approaches—aside from taxes—can reduce the external costs of smoking or make individual smokers bear at least some of those costs. For example, many local governments prohibit people from smoking inside restaurants and office buildings.
An argument against raising the tax on tobacco products concerns the regressive nature of that tax, which takes up a larger percentage of the earnings of lower-income families than of middle- and upper-income families. The greater burden of the tobacco tax on people with lower income occurs partly because lower-income people are more likely to smoke than are people from other income groups and partly because the amount that smokers spend on cigarettes does not rise appreciably with income.