Tobacco is the highest-taxed consumer product in the United States. The tools on this page allow you to examine state tax rates and the impact of tax policies and tobacco regulations on state revenues, smuggling, and effective taxes for various income groups.
Cigarettes are taxed at the federal, state, and sometimes even local levels. These layers of taxation often lead to very high levels of taxation. Taxes account for almost half of the retail price of cigarettes nationwide. In New York and Washington, more than 60 percent of the price paid by consumers comes from taxes.
Taxes vary greatly from state to state, and the wide variation in prices leads to smuggling. Low-tax products usually find their way to high-tax countries. For example, in 2020, New York was the highest net importer of contraband cigarettes. 53.5 percent of cigarettes consumed in New York were purchased illegally or from other states. New York also has one of the highest state cigarette taxes at $4.35 per pack, with New York charging an additional $1.50 per pack.
Tax tiers force state and federal governments to review each other’s tax policies. Because consumption is affected by price, an increase in federal taxes that would raise retail prices and reduce consumption would affect the revenue generated by state governments. In other words, an increase in federal tobacco taxes reduces state tax revenue by reducing legal consumption.
Recently, the US Food and Drug Administration (FDA) proposed product standards that would further restrict the legal sale of tobacco products. In 2022, the FDA proposed to ban menthol cigarettes and flavored cigars. In 2020, menthol cigarettes accounted for 37 percent of the cigarette market. We estimate that banning menthol would reduce tax collections by more than $6 billion per year.
Even more influential will be the Very Low Nicotine (VLN) product standard. The FDA could propose a product standard that would limit the level of (naturally grown) nicotine in tobacco. The result could be a de facto ban on cigarettes. The implications of such a ban would be greater than any tobacco regulation or tax that has been implemented to date.
Finally, tobacco excise taxes are highly regressive. This means that lower-income Americans pay a greater share of their income in tobacco excise taxes than higher-income groups. Consumption taxes are almost always regressive, but cigarette taxes tend to hit low-income families the hardest.
In this tool, you can explore state tax rates, smuggling rates, effective tax rates for various income groups for cigarette taxes, and the negative revenue effects of a $1 federal tax increase, the federal menthol ban, and the VLN product standard.
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