The Effects of Increasing the Tobacco Excise Tax on the U.S. Economy

Abstract

The analysis in this study examines the effects on the U.S. economy of a $1.00 per pack equivalent increase in the tobacco products excise tax which has been proposed as a means to partially finance the Clinton Administration's program of health care reform. The analytical approach used in the study consisted of a computable general equilibrium model composed of 14 producing sectors, 14 consuming sectors, six household categories classified by income and a government. The results suggest that as a result of an increase in the excise tax, there will be a decrease in output by all producing sectors of 0.21 percent, a fall in the consumption of goods and services by about 0.49 percent, a decline in total utility by 0.47 percent, and a net increase in government revenue of 1.74 percent. Moreover, as a consequence of this tax increase, tobacco consumption will decline by 12.15 percent. Clearly, an increase in the federal excise tax on tobacco products is a potent policy to curtailing smoking.