Monday, September 21, 2009

Getting the Pigovian tax right on tobacco

Pennsylvania Governor Rendell is looking for new sources of revenue to plug the budget gap in his state. Pigovian taxes are a great place to look for new revenues, because they yield revenue AND improve economic efficiency at the same time.

Tobacco products are always a tempting target. Currently, Pennsylvania, like most states, already taxes cigarettes quite heavily. In fact, Professor Kip Viscusi of Vanderbilt Law School studied the taxes on cigarettes and found that cigarette taxes actually exceeded the net externality costs associated with smoking.

For some reason, however, Pennsylvania does not tax other tobacco products (cigars, cigarillos, chewing tobacco, for example.) So Gov. Rendell wants to tax them now.

Villanova Law School Professor James Maule makes the case that the Pigovian argument for taxing cigarettes extends to taxing other tobacco products as well as cigarettes.

Cigarettes are taxed for a reason. They are taxed because their use imposes costs on society, ranging from the litter of cigarette butt through the impact of second-hand smoke to the increases in health care costs triggered by smoking. Indeed, cigarettes are taxed for several good reasons, and those reasons are no less applicable to cigars and smokeless tobacco. The differences between them are a matter of size, shape, and color. At best, one might argue that tobacco chewers don’t generate second-hand smoke, but they spit the tobacco juice all over the place, which for most people is far worse than cigarette butts covering the ground.

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