Do Big Cigarette Taxes Hurt Big Tobacco?

Pointing to the fact that tobacco-related illnesses kill 5,100 people each year in Minnesota, more than alcohol, homicides, car accidents, AIDS, illegal drugs and suicide combined, the state’s governor Mark Dayton is seeking to raise the state cigarette tax to $2.83 per pack, an increase of 95 cents.

His efforts are being mirrored in state legislatures across the country, with higher cigarette taxes appearing on the docket in many states with traditionally high numbers of smokers. Lawmakers in Alabama, Florida, Kentucky, Mississippi, Missouri, Oklahoma, and Oregon have all proposed bills that will increase taxes levied on tobacco products by rates ranging from 10 cents per pack to 64.25 cents per pack.

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Dayton was initially reluctant to pass the regressive tax, as it would it would affect low-income earners more harshly than higher earners. But, as he told the San Francisco Chronicle, the Governor ultimately decided in favor of the measure because increasing cigarette taxes has been proven to dissuade people from smoking. Statistics indicate that the federal tobacco tax bill, signed into law by President Barack Obama less than month into his first term, helped lower smoking rates. According to USA Today, the Centers for Disease Control and Prevention reported that 3 million fewer people smoked in 2010 than in 2009 as a result of the the 62-cent tax increase…

Cigarette companies believe taxes affect smoking habits as well. “It’s difficult to be specific about what influences individual adult consumer behavior, but taxes are one thing in the mix,” David Sutton, a spokesman for Altria Group (NYSE:MO), told the publication. He added that the taxes and fees are so high on cigarettes, amounting to 55 percent of Marlboro’s retail price, that they unfairly burden adults who choose to smoke.

However, even though the adverse effects of smoking have caused sales for tobacco companies to decline, begun major lawsuits, and prompted legislatures around the world to limit how manufacturers advertise their products, tobacco companies are often very good investments.

As The Telegraph reported in March of last year, companies like British American Tobacco (BTAFF.PK) and Philip Morris (NYSE:PM) have delivered strong sales growth and increased profits over the past 10 years. One reason for the growth is expansion in developing markets in Asia and Africa, but the other reason, more important for the analysis of sales in the United States, is that excise taxes actually boost profits. “We are in a unique position where consumers expect the product to get more expensive each year,” a BAT spokesman told the publication. “We are able to increase pricing at the same time, boosting profit margins.” Therefore, even though tobacco companies may sell fewer cigarettes, they are able to maintain high profits.

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