Altria Group, Inc. (MO): Do Cigarette Taxes Really Work?

^SPX data by YCharts.

How is that possible? Tobacco consumption is rising rapidly in low- and middle-income countries, as noted by the World Bank. Each company has increased its presence internationally and diversified into products such as nicotine gum, electronic cigarettes, and even wine. The group has also spent billions on advertising and millions more on lobbying. I still find it interesting that, at the end of the day, no one can blame higher cigarette taxes for hampering growth.

Can cigarettes be taxed out of existence?
If high taxes are effective, then even higher taxes should be even more effective, right? Not quite. The same New York Department of Health study quoted above questions the effectiveness of increasing taxes further. While overall consumption has fallen in the state since 2004, researchers found that households with less than $25,000 of annual income saw consumption rates decline less than 10%. More worrisome is the fact that households with $30,000 of annual income that smoked spent 23.6% of earnings on cigarettes in 2011 — more than double the 11.6% spent in 2004.

In other words, lower-income smokers are less likely to quit because of higher taxes but feel a much bigger economic pinch as a result. Consider that similar economic studies have shown that low-income households spend less than 20% of their income on food. Keep in mind that the study included the state — and city — with the highest tax rates. Nonetheless, policymakers may need to realize that increasing cigarette taxes from here may do more harm than good. Perhaps allocating more tax revenue toward a smoking awareness campaign geared toward low-income households would be more effective.

Foolish bottom line
Even if cigarette taxes are nearing a wall in terms of effectiveness, there is no debating that they have done a great job of curtailing tobacco consumption in the United States. Ironically, tobacco companies have thrived in the same time period that smoking rates have dropped by 20%. I am aware that differences persist, but perhaps this is proof that taxing other negative externalities — carbon emissions, sugary foods, and the like — won’t result in the doomsday economic scenarios often hypothesized by critics. Heck, investors in energy companies may welcome a carbon tax after seeing the performance of the tobacco industry.

The article Do Cigarette Taxes Really Work? originally appeared on Fool.com.

Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on energy, bioprocessing, and biotechnology.The Motley Fool owns shares of Philip Morris International (NYSE:PM).

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.