Taxation

Cigarettes have become very expensive in places that want to reduce the amount of smoking in public; pictured is the cost of a carton of 200 cigarettes in New Jersey.

Many governments have introduced excise taxes on cigarettes in order to reduce the consumption of cigarettes. Money collected from the cigarette taxes are frequently used to pay for tobacco use prevention programs, therefore making it a method of internalizing external costs.

In 2002, the Centers for Disease Control and Prevention said that each pack of cigarettes sold in the United States costs the nation more than $7 in medical care and lost productivity. That's over $2000 per year/smoker. Another study by a team of health economists finds the combined price paid by their families and society is about $41 per pack of cigarettes.

Substantial scientific evidence shows that higher cigarette prices result in lower overall cigarette consumption. Most studies indicate that a 10% increase in price will reduce overall cigarette consumption by 3% to 5%. Youth, minorities, and low-income smokers are two to three times more likely to quit or smoke less than other smokers in response to price increases. Smoking is often cited as an example of an inelastic good, however, i.e. a large rise in price will only result in a small decrease in consumption.

Many nations have implemented some form of tobacco taxation. As of 1997, Denmark had the highest cigarette tax burden of $4.02 per pack. Taiwan only had a tax burden of $0.62 per pack. Currently, the average price and excise tax on cigarettes in the United States is well below those in many other industrialized nations.

The cigarette taxes vary from state to state in the United States. For example, South Carolina has a cigarette tax of only 7 cents per pack, while Rhode Island has a cigarette tax of $2.46 per pack. In Alabama, Illinois, Missouri, New York City, Tennessee, and Virginia, counties and cities may impose an additional limited tax on the price of cigarettes. Due to the high taxation, the price of an average pack of cigarettes in New Jersey is $6.45, which is still less than the approximated external cost of a pack of cigarettes.

In Canada, cigarette taxes have raised prices of the more expensive brands to upwards of ten CAD$.

In the United Kingdom, a packet of cigarettes typically costs between £4.25 and £5.50 ($8.50/$11.00) depending on the brand purchased and where the purchase was made. The UK has a strong black market for cigarettes which has formed as a result of the high taxation and it is estimated that 25-30% of all cigarettes smoked in the country avoid UK taxes.