January 21, 2005

The Economics of Smoking

LIVING IN NEW HAMPSHIRE, we have found, is such a comfortable existence that going to other states in the Union can sometimes cause us to suffer fear and nausea.

For instance, when we were back in Ohio for the Christmas holidays, we went to the bookstore and bought $18 worth of goods. When the clerk informed us that we owed $19.44, we actually thought there was a mistake until we remembered Cuyahoga County has an 8 pc sales tax. In New Hampshire, of course, the sales tax is 0 pc.

We wish we could say this was an isolated incident, but it is certainly not. When we were in Washington, D.C., recently, we blanched at the amount of tax we paid on our hotel rooms (12 pc, as opposed to New Hampshire's 8 pc). When we talk with friends in California, we inevitably recall how much we paid in income taxes (9.3 pc in the Golden State, compared to 0 pc here). But the incredible thing is this. The shock and anguish we feel going elsewhere is nothing near that which our friends and loved ones feel when they come here.

For they are suddenly confronted with the fact that in New Hampshire, goods in the stores cost ... just what the prices say they cost. Then they'll inquire as to the rent we're paying on our apartment, and they learn our real housing cost has actually gone down since we moved here. Then, the real surprise comes.

"You pay HOW MUCH for cigarettes?"

It depends on the brand, of course, but it ain't much. If one buys Marlboros -- and who doesn't? -- one will pay somewhere around $25 a carton, taxes included. If one buys the off-price brands, one can expect to pay $20 a carton, perhaps even less.

Now, we personally suffer from what we call the California Effect, which to say our time there caused certain "benchmark prices" for goods and services to stick in our mind. Therefore, we get angry when the price of gasoline goes up -- but only if it goes higher than $1.75. We get annoyed when the price of milk goes up, but only if it goes above $4 per gallon. And in our mind, the benchmark price for a carton of cigarettes is $45, and less in Nevada.

For our friends a bit farther down on the Eastern Seaboard, the only way they can pay $45 per carton is if they buy out of somebody's trunk. We knew the prices down there were bad enough to warrant taking New Hampshire cigarettes on the road with us, but we had no idea how bad they were until we read about this sad story out of New York.

It seems that certain New Yorkers, facing $7.50 per pack prices at minimum for their smokes, decided to be clever and order cigarettes off the Internet. This seemed like a win-win: the smoker got cheap cigarettes, the buyer made his sale, and so on. But the loser in the equation was the city of New York, which found itself losing out on its $1.50 per pack of tax revenue. In all, a New York City smoker pays $3 in tax on each pack of smokes.

Now, the New York Daily News informs us the city is Not Happy about this, and is dunning a whole bunch of smokers for the city taxes they owe. Apparently, the buyers are supposed to voluntarily pay the tax if they buy cheap cigarettes from elsewhere.

This seems a bit much, if you ask us. Not so much in terms of the law -- the law is the law, even if it is stupid -- but in general principle terms.

After all, it's one thing if you're dealing with income taxes -- those are taxes to which everyone is subject (and with April 15 coming up, we remind all Rant readers to pay all the taxes they owe to everyone). But when it comes to sales and use taxes, which vary between states, it seems unjust to make people suffer simply because other jurisdictions are more competitive than the ones in which they live. And on general principle grounds -- if not, apparently, legal grounds -- this seems like tax avoidance, not tax evasion.

It also amazes us the city of New York thinks Civic Virtue will trump the basic laws of economics. Mayor Michael Bloomberg, in keeping with his Crusade Against Fun, has no sympathy for the smokers who avoided their taxes. Yet the laws of supply and demand are inviolate. As long as cigarette prices in the city are extraordinarily high, people will take extraordinary measures to find cheaper cigarettes. It's not rocket science. It's basic, entry-level stuff that any adult knows.

It's also no surprise that other jurisdictions are following suit, as New York's move was so extreme it gave them lots of incentive to do so.

For instance, let's look at New Jersey and nearby states as an example.

When New York City put a $3 per pack combined tax in place, New Jersey's taxes were $2.05 per pack. That gave them 95 cents in breathing room to manuever -- actually, a bit more, as New Jersey's cigarettes were previously 47 cents costlier per pack than New York City's. New Jersey soon raised its cigarette tax to $2.40 per pack -- and why not? They had the pricing power to do that, and it was politically easy after New York City decided to walk the plank. Pennsylvania did the same thing, hiking its cigarette tax from $1 per pack to $1.30 per pack. Despite the increase, they still preserved their price advantage over New Jersey accordingly. Nearby Virginia also increased its cigarette taxes, from 2.5 cents per pack to 20 cents per pack.

What's interesting about this is that none of these states lowered their cigarette taxes. That to us would seem the best move economically, because it would move the demand curve outward. But the experts say that increased prices will cause people to give up the filthy habit, and that's cheaper and better in the long run anyway. We don't know if that's true, but we have seen anecdotal evidence to suggest it.

Speaking personally, though, we can say increased prices would not have an impact on our smoking habits. Further, because we are a student of economics, we would find a way or make one to ensure we came out revenue-neutral on the deal. For instance, we can and would give up one dinner out per month just on general principle grounds -- it would be a painless way to slap the grasping hand reaching for our wallet.

Of course, in terms of smokers' personal economy, it would be far cheaper for us all if we just gave up the damned cigarettes in the first place. Smokers would be greatly helped in this regard if the cessation products were generally covered under health insurance, or were cheaper than smoking in the first place. But that is a subject for another post.

(cigarette tax information from the American Lung Association).

Posted by Benjamin Kepple at January 21, 2005 12:43 PM | TrackBack

Cartons here in the Garden State now go for between 56 and 65 bones, depending on deals. At gas stations, Marlboro Lts are 6.97 per pack. Shite.

Posted by: simon from jersey at January 21, 2005 08:28 PM

Shite is right.

Posted by: Benjamin Kepple at January 22, 2005 01:21 AM

Sadly, the cost per pack reflects just a tiny proportion of the real cost of those cigarettes to those who smoke them.

Posted by: Swammi in Solon at January 22, 2005 09:31 AM