Academic journal article Contemporary Economic Policy

The Impact of Nonrevenue Maximizing Factors on State-Level Cigarette Tax Rates

Academic journal article Contemporary Economic Policy

The Impact of Nonrevenue Maximizing Factors on State-Level Cigarette Tax Rates

Article excerpt


Conventional theory suggests that many factors influence policy makers when they set out to determine the level of commodity taxes. One factor is the impact these taxes will have on demand behavior. Another factor is the amount of excess burden or deadweight loss created by the tax, along with the amount of tax revenue that will be generated by these taxes.

What this article will examine is the extent (if any) to which policy makers' decisions concerning commodity tax rates are influenced by nonrevenue-maximizing influences. Namely, the focus is to examine the impact that these influences can have on state-level cigarette tax--setting behavior. Organizations dedicated to reducing tobacco consumption see increased tax rates on tobacco products as one way of achieving their goal. This work explores the impact that such organizations can have on tax-setting behavior.

Policy makers are always keenly aware of the impact that commodity taxes have on demand behavior. Commodity taxes are often used to adjust output levels to achieve some socially optimal level of output in the face of externalities. We most commonly refer to these taxes as Pigouvian taxes.

Much work has gone into deriving the equations that identify the optimal tax rate. (1) Policy makers seeking to influence demand behavior use taxes in combination with other regulatory policies to achieve social goals. However, a large body of literature, including research by Barnett et al. (1995) and Gruber (2001), reveals that the demand for cigarettes is highly inelastic. This article adds to the literature in that it examines to what extent (if any) tax rates on cigarettes are adjusted to reflect the influence of interest groups that are not concerned with revenue issues but with consumption levels.

The idea of organized special interest groups lobbying to influence policy outcomes is not new. There is a large body of literature regarding special interest influence that dates back to works by Schattschneider (1935), Tullock (1959), and Olson (1965). Potters and Sloof (1991) provide an excellent survey of recent empirical models of interest groups, and Mitchell and Munger (1991) survey the theoretical models of interest group influence.

The general framework from which these models are derived states that individuals who derive benefit from legislative action can collectively lobby for favorable policy outcomes. As discussed in great detail in Persson and Tabellini (2000), the concentration of benefits to select parties and the dispersion of costs across a wide population can lead to excessive spending and inefficiencies in financing.

In equation (1), commodity taxes are modeled as a function of the policy maker's desire to minimize excess burden, maximize revenue, and take into account nonrevenue-maximizing influences. (2) The impact of these nonrevenue influences on tax rates is explored in this article.

(1) t = f(TR,D.WL,NR),

where t is the commodity tax rate, TR is tax revenue, DWL is the excess burden of the commodity tax, and NR is the nonrevenue considerations that affect the tax rate.

Specifically, this work will examine the influence that two programs had on state-level cigarette tax rates during the period of 1980 through 1997. The author examines the influence, if any, that the amount of state-level giving in the form of private donations to the American Cancer Society (ACS) had on cigarette tax rates over the sample period. The author also examines the relationship between the cigarette tax rates of those states. that participated in a program to reduce tobacco consumption and those that did not. The program was sponsored by the National Cancer Institute (NCI) and ACS and was called the American Stop Smoking Intervention Study for Cancer Prevention (ASSIST). (3)

One of the ways that the participants in ASSIST expected to reduce tobacco consumption was to aggressively endorse efforts that would lead to higher tobacco tax rates, thereby reducing consumption. …

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