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April 15, 2013 1:58 PM Build a Better Federal Tobacco Tax

By Keith Humphreys

President Obama’s budget proposal includes a hike in tobacco taxes. Right now, taxes are so high in some places (e.g., New York City, Chicago) that evasion happens on a grand scale and the black market in untaxed cigarettes is thriving.

Meanwhile, taxes are so low in other places that there is little incentive not to take up the smoking habit.

Last but not least, the disparity in state tobacco taxes is fueling a huge smuggling market of cigarettes from low-tax states such as Virginia to high-tax states such as New York.

A better mousetrap would be a federal tax that kept the price of a pack of cigarettes high and roughly uniform around the country.

To those with legal and/or tax policy expertise: Is it Constitutionally permissable for the federal government to set the federal tax on cigarettes to reach a set post-tax price (e.g., $5 a pack), meaning that the federal tax would be huge on Virginia cigarettes and miniscule on Illinois cigarettes? If that is legally verboten, could the federal government set a flat federal tax but rebate its income from it disproportionately to states with high state and local tobacco taxes, thereby providing an incentive (i.e., bribe) for low-tax states to raise their tobacco taxes?

[Cross-posted at The Reality-based Community]

Keith Humphreys is a professor of psychiatry and behavioral medicine at the Stanford University School of Medicine.
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