This Op-Ed writer in The WSJ – Brad Schiller – asserts that Obama’s ‘trebling’ of excises on cigarettes from 39 cents to $1-01 (it is not a ‘trebling’!) will reduce the tax revenues accruing to US states collecting the tax given an elasticity of demand for cigarettes of -0.8. That is a true statement – state tax receipts will decrease – if state taxes are held constant with the increase – though Federal tax collections will increase.
Federal taxes will increase because if demands remain inelastic increased taxes will increase the revenues on units that continue to be sold more than revenues will be lost because fewer units will be purchased. When demand is inelastic purchases don’t fall a lot when prices rise.
The rest of the article doesn’t impress. The increased tax, it is claimed, should be rejected because it falls on the ‘poor’. But it is foolish to consider the impacts of individual taxes on the welfare of the poor without considering the overall tax-transfer incidence. Poor people might lose from this tax but gain from the overall tax-transfer system.
Moreover, the poor gain in terms of being less likely to die from lung cancer and heart disease. Since the rich pay the tax they contribute tax revenue which can compensate the poor for any welfare losses they incur from not being able to kill themselves by smoking cigarettes. I wouldn’t worry much at all about adverse distributional implications.