Effects of an increase in the federal excise tax on cigarettes

Listed in:

• Pricing strategies
• Tobacco industry's tactics relating to tax

Abstract

The economic impact of a cigarette tax increase on the cigarette and tobacco industries depends on market forces and on the U.S. tobacco program. This study uses a log-linear equilibrium displacement model, parameter estimates from prior studies, and recent data to indicate quantitative effects. International trade implies that the effect of the tax increase on the price of domestic tobacco will be small, even in the case of fixed tobacco quotas. However, the effects on tobacco producers' revenue, quota lease rates, and producer economic rents can be significant, depending on the response of U.S. tobacco policy to a tax change.