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Whiskey & Cigarettes - How Taxes Change Behavior

Apparently, in today’s economy consumers really do change their habits based on taxation.  Not only are Florida residents driving across the borders to avoid the $1/pack increase in cigarette taxes, but New Hampshire, which does not tax alcohol, is cashing in on increased sales from residents of neighboring states.

While this might seem to be a blinding glimpse of the obvious, I think there is more to it.  State legislators do not raise taxes in a vacuum, they have budget staff that analyze potential responses to tax increases in order to make intelligent estimates of revenue.  As I posted previously in Time To “Geek Up”… the State of FL has a Measures Affecting Revenue report that clearly shows an estimate of lost tax revenue from lower purchases, but then increased tax revenue from the higher tax.  The net number is of course positive, because if the estimate was negative it would not be worth doing.

My point about this being a more substantial issue is based on the fact that consumers are indeed reacting in apparently big numbers.  I believe this speaks to the state of the economy and the heightened sense of conservation among spenders, whereas two years ago I think convenience, by and large, would have won out. 

Time and again I’ve discussed this issue of those paying a tax reacting to an increase in the level of taxation.  As we ponder very big programs with very big price tags, it is worth considering what happens when we increase the price of a pack of cigarettes by a buck.