AN ECONOMIC ANALYSIS OF THE 1983 INCREASE IN THE FEDERAL EXCISE TAX ON CIGARETTES

This report analyzes some likely effects of the recently passed federal cigarette tax increase. An equilibrium displacement model of the cigarette industry is developed. It includes relationships for / international trade in cigarettes and tobacco, federal cigarette taxes, and market interrelationships between cigarettes and tobacco and other inputs in cigarette manufacturing. A range of values for the demand ru1d supply elasticities is used to examine the sensitivity of the calculations. The major results of this study are: (a) the price of cigarettes will rise by almost the full amount of the tax increase; (b) the cigarette price increase will lead to about a 5 to 6 percent reduction in domestic sales of cigarettes, but some increase in quantities exported will offset domestic sales declines; (c) national distribution of cigarette sales will be altered slightly because relative price increases will be largest where current prices (and state tax rates) are lowest; (d) the effect of the tax increase on the price of domestic tobacco will be small -- even holding the production of tobacco constant -- because of the importance of international trade in cigarettes and tobacco as well as substitution with other inputs; and (e) a reduction of the real support price of tobacco in response to the tax increase will cause a fall in average tobacco quota lease rates