The 1983 Increase in the Federal Cigarette Excise Tax

0.09 per pack, exclusive of the federal excise tax.There is little evidence that such price increases were matched by cost increases.The preannouitced, one-time federal tax increase appears to have served as a focal point for coordinating oligopoly price increases by sellers.Accordingly, the full impact of the increase in the federal excise tax may not have been the legislated $0.08 per pack rise in price, but a market-induced jump in price of about $0.16 per pack.Quite contrary to the conventional view of the incidence of excise taxes, the federal excise tax may actually have had a multiplier effect upon price.During 1981-1986, per capita consumption of cigarettes declined 15 percent.The increase in cigarette prices was probably the main cause of the decline.The decline in cigarette use reflected mostly a decrease in the number of cigarette smokers rather than in the amount smoked by continuing users.The evidence supports the hypothesis that price increases do not induce smokers to cut down on the number of cigarettes.Instead, they either induce existing smokers to quit or prevent potential smokers from starting.Even if a rise in the price of cigarettes reduces the number of smokers, there is insufficient evidence to determine whether the effect is reversible.We do not know whether quitters would resume smoking if the price were to fall, or whether more teenagers would start.Who cuts down on cigarettes, who quits, and who fails to start are critical questions in assessing the quantitative effect of a cigarette tax increase on the health of the population.It is likely that, as a result of the price-induced decline in cigarette consumption during 1982-1985, about 100,000 additional persons will survive to age sixty-five.The cigarette tax has already been studied, argued about, and reviewed.I hardly intend yet another review of the reviews.In particular, I do not inquire about the general role of excise taxes in federal tax policy, nor do I compare cigarette taxes to other federal excise taxes, such as those for the airport and highway trust funds.I do not ask whether increases in federal excise taxes usurp the states' taxing roles.For the year ending June 30, 1986, federal excise tax revenues on cigarettes were an estimated $4.4 billion,1 constituting 13 percent of total federal excise tax 1.U.S. Department of Agriculture, Economic Research Service.Tobacco situation and outlook report.Number TS-195, September 1986, Table 31.U.S. Department of Treasury.U.S. Treasury Bulletin.3rd quarter, fiscal 1986.Table FFO-2.U.S. Department of Agriculture, Economic Research Service.Tobacco situation and outlook report.Number TS-195, September 1986, Table 31.Economic report of the president.February 1986, Table B-14.U.S. Department of Labor