November 13, 2013
OPTIONS FOR REDUCING THE DEFICIT: 2014 TO 2023

RevenuesOption 16

Increase the Excise Tax on Cigarettes by 50 Cents per Pack

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Outlays * * * -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.6
Change in Revenues 3.3 4.0 3.9 3.7 3.7 3.7 3.6 3.6 3.6 3.6 18.6 36.8
  Net Effect on the Deficit -3.3 -4.0 -3.9 -3.8 -3.8 -3.8 -3.7 -3.7 -3.7 -3.7 -18.8 -37.4

Sources: Staff of the Joint Committee on Taxation; Congressional Budget Office.

Notes: This option would take effect in January 2014.

* = between -$50 million and zero.

Both the federal government and state governments tax tobacco products. Currently, the federal excise tax on cigarettes is $1.01 per pack, and the average state excise tax on cigarettes is $1.51 per pack. In addition, settlements that the major tobacco manufacturers reached with state attorneys general in 1998 require the manufacturers to pay fees (which are passed on to consumers) that are equivalent to an excise tax of about 60 cents per pack. Together, those federal and state taxes and fees boost the price of a pack of cigarettes by $3.12, on average.

This option would raise the federal excise tax on cigarettes by 50 cents per pack beginning in 2014. That rate increase would also apply to small cigars, which are generally viewed as a close substitute for cigarettes and are currently taxed by the federal government at the same rate as cigarettes. The staff of the Joint Committee on Taxation (JCT) and the Congressional Budget Office estimate that the option would reduce deficits by $37 billion from 2014 to 2023: Revenues would rise by $37 billion, and outlays would decline by almost $1 billion, mainly as a result of reduced spending for Medicaid and Medicare. (Because excise taxes reduce the income base for income and payroll taxes, an increase in excise taxes would lead to reductions in revenues from those sources. The estimates shown here reflect those reductions.)

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. CBO estimates that a 50 cent 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 will be the case under current law because a smaller share of future generations would take up smoking. 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 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), the changes in health and longevity would also 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 gradually outweigh the effect of lower health care spending per beneficiary, and federal outlays would be higher after that than they are under current law. In addition to the direct effect of the excise tax, revenues would also rise as a result of the improvements in health, which would lower premiums for private health insurance. The corresponding reduction in employers’ contributions for health insurance premiums, which are not subject to income or payroll taxes, would ultimately be passed to workers in the form of higher taxable compensation, raising federal revenues.

One rationale for raising the excise tax on cigarettes 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. Raising the tax on cigarettes would reduce the number of smokers, thereby reducing the damage that people would do to their long-term health. However, studies differ on how people view the risks of smoking, with some research concluding that people underestimate those risks and other research finding the opposite.

Another rationale for raising the excise tax on cigarettes is that smokers impose costs on nonsmokers that are not reflected in the pretax cost of cigarettes. Those costs, which are known as external costs, include the damaging effects that cigarette 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. 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 cigarettes is 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 cigarette 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.

Some observers also object to using the cigarette tax as a mechanism for changing people’s behavior regarding smoking. In particular, some observers argue that consumer protection is a specious justification for cigarette taxes when many other choices that people make—for example, to consume some types of food or engage in risky sports—can also cause health damage.