The Efficiency of Tobacco Taxation

Tobacco use is the leading cause of preventable death globally (CDC 1). Tobacco tax models can be considered optimal, because even with imperfect collection and the capacity for avoidance, the long-term impact of the tax shows decreased tobacco use among the highest risk groups (teen users, and low socio-economic status users). Tobacco taxes act as a push towards health equity, and furthermore serve as a model for extremely effective, large scale behavior change at low-effort cost.

Taxing consumer goods is inherently inefficient to firms, as it imposes additional costs which serve as a shock to the equilibrium. It is impossible to assess the impacts of a deterrent tax by measures of the producers of the good. Instead, a better lens to examine the efficiency of a tax that supports public health is the long-term health impacts and product use behaviors of different communities.  Tobacco taxes have been historically successful because there are limited substitutes within the marketplace and tobacco itself is highly addictive. Within the last 5 years there have been an influx in market substitutes, which will not be discussed in this paper but can be attributed to the plateauing of teen tobacco use. For any consumer good tax to impact behavior changes, the tax needs to impact in two ways: first, the tax must be passed onto the consumer (instead of being absorbed by producers); and it needs to be notable to the consumer. With incremental increases, consumers can adjust their budgets and behaviors to make room for the marginal increases but are more likely to reduce their consumption when faced with a large price increase (CTFK 3). While tobacco taxes are inefficient to firms, they are efficient as a tool for tobacco cessation, and a revenue source for governing bodies. The deadweight loss accumulated by the producer can be used as a measure of effective policy.        

An important additional consideration is how equitable the tax is – and who is most harshly impacted. When considering equity regarding tobacco taxation, it can be compelling to call this a regressive tax, as it disproportionately impacts low-income earners. While it is true that those with lower socioeconomic status will most acutely feel the burden of these taxes, it is paramount to consider the long-term term health implications of continued tobacco use, especially as non-communicable diseases are now the leading cause of deaths worldwide, causing over 70% of all deaths (WHO 1). With large tobacco companies explicitly targeting low-income earners (Truth Initiative), the greater equity issue is aligned with the reality that tobacco will kill up to half of its users (WHO 1). This is most evident through a lens of income elasticity; as those within the highest income brackets are not high smokers, it can be assumed that high income earners are able to make informed decisions about addictive substance use, underscoring that tobacco qualifies as an inferior good. Additional consideration should be given to those in tobacco related agriculture, a group that is often considered the most marginalized of all agriculture professionals, and largely at the mercy of the world’s largest tobacco corporations. Tobacco taxation cannot be considered equitable without tax revenue being allocation to alternate crop and alternate livelihood programs. Those beholden to the economics of the tobacco industry are directly and negatively impacted by the thriving of that industry.

Compliance with tobacco taxation should be considered on a regional basis, as avoidance will be typical to other luxury taxes. One region’s compliance is only as good as it’s neighboring region, so long as citizens can easily access other regions with different regulations. Additionally, governments will need to have adequate tax collection systems. While tobacco taxes aren’t radically different from other consumer good taxes, the efficiency on collection is dependent on what systems a government has in place (WHO 5). In theory, this is relatively simple, as it is calculated at time of sale and merchants are responsible for producing the tax for the government, without heavy burden to the municipality. Additionally, as the tobacco industry is closely held with only a few large producers, their prominence makes them easily identifiable and easy to track in terms of taxes owed. Implementation of a tobacco tax conforms to existing avenues of governance and is therefore a straightforward affair.

Due to the addictive nature and poor health implications of tobacco, it can be determined that it is within the public’s interest to deter use among all demographics. This is, however, especially true of vulnerable populations with inadequate healthcare and insufficient education around the long-term consequences of tobacco use. Such reforms are a low-barrier method for governments to apply interventions that make this harmful substance less abundant in communities and limit the damage that can be caused. Additionally, tobacco taxes often serve as a fruitful revenue source for governments, which can offset the staggering healthcare expenses that are a result of tobacco use. It is for these reasons that tobacco tax can be considered effective, equitable, and enforceable.  


CDC. Smoking & Tobacco Use. 15 November 2019. website. 6 March 2020. <;.

CTFK. Raising Cigarette Taxes Reduces Smoking, Especially Among Kids. 28 June 2019. 8 March 2020. <;.

Truth Initiative. Tobacco is a Social Justice Issue: Low-Income Communities. 31 January 2017. 7 March 2020. <;.

WHO. Noncommunicable diseases. n.d. March 2020. <;.

—. Tobacco. 26 July 2019. 8 March 2020. <;.

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