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POLICY INSIGHT
BEYOND THE NUMBERS

Tobacco Taxes Reduce Health Disparities, Raise Needed Revenue

[Update, September 29: We’ve updated this post.]

The House Ways and Means Committee’s legislation to raise much-needed revenue would increase federal taxes on manufacturers of traditional tobacco products and begin taxing manufacturers of e-cigarettes, the use of which the Surgeon General has called an epidemic among young people. And while tobacco and nicotine taxes raise legitimate questions about fairness for low-income people, the common regressivity criticism neglects the full picture of the health improvements they can provide — especially among low-income people — and the public investments they can support.

Tobacco use causes massive, costly health damage. According to the Centers for Disease Control and Prevention (CDC), smoking is the leading cause of preventable death. Each year cigarette smoking leads to more than 480,000 deaths in the United States, 1 in 5 deaths nationally. More than 41,000 deaths annually are attributable to secondhand smoke. And for each death smoking causes, there are at least 30 people living with a serious smoking-related illness. The CDC warns that smoking damages “nearly every organ of the body” and that it can lead to a wide range of serious diseases, including cancer and heart disease. The cost of smoking exceeds $300 billion a year in medical care and lost productivity.

These costs and health burdens fall disproportionately on low-income people, who are more likely to smoke and less likely to have access to health care. African Americans in particular are disproportionately likely to die from smoking-related illnesses and “are more likely to be exposed to secondhand smoke than any other racial or ethnic group.” The CDC also notes that “tobacco companies have historically placed larger amounts of advertising in African American publications, exposing African Americans to more cigarette ads than Whites.” Public health policies that can reduce smoking will therefore also reduce health disparities.

Taxes decrease tobacco use by raising the cost of smoking or using other tobacco products, which encourages people to quit, deters new users, and prevents relapse, robust evidence shows. The exact size of these impacts is uncertain, but the Surgeon General concluded in a 2020 report that “increasing the price of cigarettes, such as through taxation, is one of the most effective strategies for reducing cigarette consumption.” The CDC has similarly stated, “Increasing the price of tobacco products is the single most effective way to reduce consumption.” Some evidence also suggests that younger and lower-income people are especially responsive to price increases and would see the largest potential health benefits from higher tobacco taxes.

Additionally, reductions in smoking due to tobacco taxes help address the harmful effects on bystanders, including on children of smokers and on service workers. Above-market prices for cigarettes better reflect the true social cost of smoking. Tobacco users and former users themselves also report being better off in states with higher cigarette taxes, because taxes provide a self-control device for many who would like to smoke less or quit. “Smokers themselves may be made better off by cigarette taxes,” leading economists Jonathan Gruber and Sendhil Mullainathan concluded.

The concern most frequently raised about taxing tobacco is regressivity, since tobacco use is more prevalent among low-income people. The tobacco lobby argues against regulation on these grounds. While the industry is self-interested when it makes these arguments, the incidence question — that is, whether low-income people bear more of the tax relative to their income — deserves consideration. But it is only one consideration with the taxation of a good like tobacco that has such large social costs. As former Treasury Secretary Larry Summers explains, “An ethical judgment about taxing harmful products cannot rely on the question of tax regressivity alone. Rather, it requires consideration of all the effects, including the associated health benefits, externalities, and health-care costs.”

Taking these effects into account, the regressivity “criticism is backward,” concludes Jason Furman, Chair of President Obama’s Council of Economic Advisers. “The health benefits of tobacco taxes far exceed the increase in tax liability, and these health benefits accrue disproportionately to lower-income households. Moreover, it is important to also evaluate what the revenue raised by the tobacco tax is used for.” When federal tobacco taxes were last increased by the Obama Administration in 2009, the revenue helped fund the State Children’s Health Insurance Program.

Similarly, the investments that the current Ways and Means tobacco tax proposal would help finance are highly progressive and would take historic strides in reducing poverty, inequality, and racial disparities; investing in education; and broadening opportunity. The Build Back Better legislation, which includes critical expansions of the Child Tax Credit and Earned Income Tax Credit, would reduce child poverty by more than 40 percent, including a reduction among Black children from 24.3 percent to 12.8 percent. To help offset the cost of these overdue investments, the tobacco taxes would raise about $97 billion over the next ten years, the Joint Committee on Taxation estimates.

The Ways and Means proposal would decrease overall tobacco and nicotine use by raising tobacco taxes across the board and by introducing a tax on e-cigarettes, while also ensuring the federal tax system does not encourage use of one product over another by harmonizing tax rates across types of tobacco and e-cigarettes. Two active areas of research that lawmakers should continue to weigh are how consumers substitute between combustible and electronic nicotine delivery and how e-cigarettes affect long-term health. Strong public health gains from tobacco and nicotine taxes require that people don’t simply replace one use with a cheaper or more dangerous alternative, which this research suggests may result from higher taxes on e-cigarettes.

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