In the United States, tobacco is taxed both at the federal and state level and sometimes even at the local level. These layers of taxes often result in very high levels of taxation, the highest of all consumer products. The retail price of cigarettes, for example, averages over 40 percent tax. In some states, such as Minnesota and New York State, more than 50% of the price paid by consumers comes from taxes.
The level of taxation varies considerably from state to state, and large price differences favor smuggling. It is very common for low taxed products to end up in heavily taxed states. For example, in 2018, New York was the largest net importer of contraband cigarettes, accounting for 53.2% of total cigarette consumption in the state. New York also has one of the highest cigarette taxes in the state ($ 4.35 per pack), not including the additional local New York City cigarette tax ($ 1.50 per pack ).
Tax levels also mean that it is relevant for state governments what the federal government decides in terms of tax burden and vice versa. Since consumption is affected by retail prices, an increase in federal taxes, which would result in higher retail prices and lower consumption, can impact the revenues generated by state governments. In other words, federal tobacco tax increases decrease state tax revenues by lowering legal consumption.
Finally, excise taxes on tobacco are very regressive. Most excise taxes are regressive, but the regressive effects of tobacco taxes are more pronounced because the incidence of smoking increases as income decreases. This means that Americans with low incomes pay a greater share of their income in excise taxes on tobacco. How much depends on the tax burden of each state.
In this tool, you can explore state tax rates, contraband rates, the negative effect on income of a $ 1 federal tax increase, and effective tax rates (including taxes federal and state) for different income groups.
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