Effects of an Increase in the Federal Excise Tax on Cigarettes

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. Key words: agricultural policy, cigarette industry, equilibrium displacement, excise tax, policy simulation, tobacco industry. Often agricultural policy is discussed only in the context of legislation that directly relates to farmers and raw commodities. This paper examines the impact of a policy change that directly affects the wholesale market for the processed good. Our approach is generally useful for analysis of policies that may have important effects at several stages in the pro-duction and marketing chain. The January 1983 doubling of the federal excise tax on cigarettes was the first change in the tax in thirty years. 1 In this paper we use demand and supply estimates from other stud-ies, plus recent cost and market share data, to simulate the effect of a tax increase on prices, quantities, quota lease rates, and producer economic rents in the tobacco industry. The impact of a change in the cigarette tax on the tobacco industry is particularly interesting be-The authors are an associate professor of economics and business at North Carolina State University and an associate professor of agricultural economics at Texas A&M University. Senior author-ship is not assigned