Tobacco Tax Fact Check (Part Two)

This is the second half of a two part blog, fact checking tmyths about tobacco taxes.  This blog focuses on what the some call a good tax model – taxing tobacco products based on the wholesale price:

One reason why basing the [smokeless tobacco] tax on wholesale prices is the standard in so many states is that the amount of revenue collected increases if prices go up.

To begin, taxing smokeless tobacco products because it may harm the consenting adult, who engages in it, is not sound logic for a tax. As the Tax Foundation explains, the role of government is not to prevent individuals from harming themselves (e.g. stop us from consuming soda, salt, fatty foods, etc.), but from harming one another.

An industry should only have a “special” tax on it if it is determined the product imposes significant costs on third parties. External health costs, such as second-hand smoking, is often cited as a reason (though a controversial one) for a tax on cigarettes. However, third parties are not affected with smokeless tobacco products.

But for the sake of discussion, let’s accept the argument that an external cost is the message chewing tobacco sends to children. This brings us back to why tobacco should not be taxed on the wholesale price as the prices has nothing to do with the external costs the product imposes on society.

As the Tax Foundation makes clear:

The harm caused by a unit of tobacco is essentially unrelated to its price. A $5 pack of cigarettes would not impose any costs to society or harm any individuals more than a $2 pack of cigarettes would. With respect to cigarettes, most tax-levying officials have properly understood this because every state imposes the tax based on the number of cigarettes, not based upon the sale price.

When a tobacco tax is imposed as the one proposed, it is to create a new revenue source for lawmakers at a higher cost to residents. Legislators should not be unfairly and arbitrarily leveling taxes on any industries.