The federal tax on cigarettes is set to go up by $.62 a pack (to $1.01) on Wednesday. The question that immediately jumps to my mind is 'What's the goal--cessation or revenue generation?'
Medical groups see a tax increase right in the middle of a recession as a great incentive to help persuade smokers to quit.
Tobacco taxes are soaring to finance a major expansion of health insurance for children. President Barack Obama signed that health initiative soon after taking office.
Unfortunately, us grumpy economists are likely to point out that consumption reduction and revenue generation aren't really consistent goals. If consumers don't react much to price increases (demand is inelastic) then the President gets his revenue to fund his insurance increase. But, as prices rise, demand tends to become more elastic and consumers react more to price increases. So, if we are reaching a point where consumers are starting to react to the cigarettes price increases (demand is elastic) then the medical groups will see reductions in smoking, but federal cigarette tax revenues will fall.
