A Growing Sin-dustry: The History and Effects of Cigarette Excise Taxation and Regulation in the United States

Abstract

Originating with the gabelle taxes of France during the close of the Albigensian Crusades, excise taxes and regulations on consumer products have historically been used by local and federal governments to generate revenue during periods of war. Following the enactment of the Internal Revenue Act on June 30, 1864, the United States extended their definition of consumer products to include cigarettes and other tobacco products. The United States Federal government justifies cigarette taxes as a method not only to discourage the habit of smoking but also to recover the costs of the negative externalities associated with the “sinful” behavior. Through an analysis of price elasticities as well as individual state taxation and cigarette consumption data, this thesis attempts to explain why increased prices of cigarettes due to excise taxes are not effective deterrents for smokers without additional enforcement of tax-avoidant behaviors. The first section of this study defines excise taxation through historical and contemporary theories. In addition, the analysis chronologically reviews the history of excise taxation and regulation, including those imposed on cigarette and tobacco, in the United States. This chronological review also highlights the evolution of government policy and the acceptability of cigarette consumption in the United States. The second section analyzes tobacco taxation in the United States during the year 2015. The section begins with an overview of the federal governments’ tobacco taxation policies in the nation. The section concludes with a review of differing taxation rates in individual states. The conclusion introduces factors that affect smoking behavior, which will be used in the proceeding econometric analyses. The third section uses an econometric analysis, conducted by John Lovell Jarvis at Wesleyan University, to explain the price elasticity of cigarettes and the impact of tax-induced prices on annual per capita cigarette consumption. The fourth section also illustrates a differing explanation of price elasticity from the perspective of tobacco companies. The final section studies the impact of cigarette taxation in the state of New York as well as the advantages and disadvantages of cigarette excise taxes. The section explores the increases in tax-avoidant behaviors and additional legislation that affect cigarette consumption in New York and the United States as a whole. Using the results from these studies, the conclusion section discusses the effects of cigarette taxation and regulation on consumer smoking behavior in the United States