Economic Assessment of Proposed Cigarette Excise Tax Hikes in the State of West Virginia

Diploma Thesis from the year 2002 in the subject Business economics - Economic Policy, grade: 1,0, Technical University of Braunschweig (Wirtschaftswissenschaften), language: English, abstract: Inhaltsangabe:Abstract:§Many states in the U.S., including West Virginia, are recently contemplating increasing the state cigarette excise tax rate in order to alleviate their tense budgetary situation. §Two groups have dominated the political process of cigarette tax legislation. The health community contents that smokers impose costs on the society by excessively using the health care system and damaging the health of non-smokers through second hand smoke. Also, youth are unaware of the full risks of smoking and therefore unable to make fully informed decisions. Therefore, the health community demands higher cigarette taxes to deter youth smoking and make smokers bear the costs they impose on the public.§The tobacco industry, lobbying for low cigarette taxes, argues that the current cigarette tax is sufficient to compensate for the excess health care costs of smokers. Higher taxes are also said to disturb the free market mechanism by depriving consumers of making free consumption decisions. Most importantly, rising tax differentials between states would lead to a large smuggling problem. In fact, West Virginia s border states Kentucky and Virginia and nearby North Carolina levy the lowest cigarette excise tax rates in the nation, currently being 3, 2.5, and 5 cents per pack, respectively. A tax hike on top of West Virginia s current 17 cents per pack may promote tax evasion and thus counteract the fund-raising efforts of the West Virginia State Government.§This study carefully examines the economic validity of both lobby groups arguments and aids the legislative decision making process by providing a scientific framework for the appropriate taxation of cigarettes in West Virginia.§Part I determines the efficient cigarette excise tax rate based on economic efficiency theory. Three potential market failures associated with cigarette consumption are examined: (1) External costs, (2) incorrect risk perception, and (3) addictive behavior. Criteria for the estimation procedure of the economic costs and the cost estimation of those market failures are presented and comprehensively discussed. The study particularly embeds the application of different addiction models to smoking decisions and assesses their fundamentally different impact on the efficient tax rate. For this purpose, the standard model of rational addictive behavior and the recent approach of time-inconsistent addictive behavior are reviewed. Based on most recent evidence, this study concludes that the approach of time-inconsistent addictive behavior provides a more compelling picture of real-life cigarette smoking decisions and finds that the efficient tax rate is at least 35 to 52 cents higher than the 17 cents currently levied.§Part II analyzes how consumption, sales, and cigarette tax revenues are going to be affected by a tax hike that raises the cigarette tax to the efficient level by developing and assessing a comprehensive econometric model of cigarette demand for West Virginia. Among other things, the model carefully takes into account cross-border activities, such as private and criminal smuggling.§Evaluated in conjunction with the results from Part I, the conclusion leads to the recommendation of the range for a cigarette excise tax rate in West Virginia.§Inhaltsverzeichnis:Table of Contents:§List of ContentsI§List of FiguresV§List of TablesVI§List of AbbreviationsVII§A.Introduction1§B.Problem Statement and Solution Structure3§I.Determining the Efficient Cigarette Excise Tax Rate in West Virginia4§I.1Introduction4§I.2Cigarette Tax Rates in West Virginia as of 08/01/20024§I.3Definition and Differentiation of Economic Efficie...