Ohio Raises Cigarette Taxes

The State of Ohio recently raised cigarette taxes by 70 cents, to a total of $1.25 per pack. Since a pack of cigarettes now sells for around $4.00 a pack, this represents about a 20% increase in price. Governments generally impose taxes in order to generate revenue to pay for various spending priorities (to fund education, roads, and the salaries of police officers, among others). Governments may also levy taxes to curb undesireable behaviors such as cigarette and alcohol consumption--such taxes are often referred to as "sin" taxes. Crucial to both government objectives is the nature of the demand curve for cigarettes and alcohol. Most economic studies indicate that the demand for cigarettes and alcohol are fairly inelastic. For cigarettes, the elasticity of demand is somewhere between -0.3 and -0.5. If we take -0.4 as a reasonable estimate, then the 20% increase in cigarette prices can be expected to reduce consumption by about 8%. What impact do you think this will have on cigarette tax revenues? Do you think it will cause any smokers to stop altogether? One interesting question for border cities like Marietta is what will happen to local retail sales given that the tax in West Virginia is only $0.55 per pack.