An Economic Assessment of Proposed Cigarette Excise Tax Hikes in the State of West Virginia

Inhaltsangabe:Abstract: Many states in the U.S., including West Virginia, are recently contemplating increasing the state cigarette excise tax rate in order to alleviate their tense budgetary situation. Two groups have dominated the political process of cigarette tax legislation. The health community contents that smokers impose costs on the society by excessively using the health care system and damaging the health of non-smokers through second hand smoke. Also, youth are unaware of the full risks of smoking and therefore unable to make fully informed decisions. Therefore, the health community demands higher cigarette taxes to deter youth smoking and make smokers bear the costs they impose on the public. The tobacco industry, lobbying for low cigarette taxes, argues that the current cigarette tax is sufficient to compensate for the excess health care costs of smokers. Higher taxes are also said to disturb the free market mechanism by depriving consumers of making free consumption decisions. Most importantly, rising tax differentials between states would lead to a large smuggling problem. In fact, West Virginia’s border states Kentucky and Virginia and nearby North Carolina levy the lowest cigarette excise tax rates in the nation, currently being 3, 2.5, and 5 cents per pack, respectively. A tax hike on top of West Virginia’s current 17 cents per pack may promote tax evasion and thus counteract the fund-raising efforts of the West Virginia State Government. This study carefully examines the economic validity of both lobby groups’ arguments and aids the legislative decision making process by providing a scientific framework for the appropriate taxation of cigarettes in West Virginia. Part I determines the efficient cigarette excise tax rate based on economic efficiency theory. Three potential market failures associated with cigarette consumption are examined: (1) External costs, (2) incorrect risk perception, and (3) addictive behavior. Criteria for the estimation procedure of the economic costs and the cost estimation of those market failures are presented and comprehensively discussed. The study particularly embeds the application of different addiction models to smoking decisions and assesses their fundamentally different impact on the efficient tax rate. For this purpose, the standard model of rational addictive behavior and the recent approach of time-inconsistent addictive behavior are reviewed. Based on most recent evidence, this study [...]