Monday, May 20, 2013

The Dangers of Funding Government Programs With Cigarette Tax Revenues: French Government Delays Tobacco Price Increase Because Too Many Smokers Have Quit

According to an article in the New York Times, the French government, in an effort to prevent too many smokers from quitting and therefore seeing a decline in cigarette tax revenue, has reached an agreement with tobacco manufacturers to delay a price increase that had been scheduled to take effect in July.

According to the article: "Governments have an ambivalent attitude about tobacco, on the one hand lecturing smokers at every turn to abandon nicotine, while with the other hand raking in cigarette sales taxes to finance their treasuries. The anomaly was underlined on Friday with a reported agreement by the French government and tobacco manufacturers to delay a scheduled price increase for three months because too many smokers have quit. In the first quarter of 2013, for the first time in 10 years, the value of French tobacco sales fell. ... The next price and tax increases were due in July, but the makers have agreed to take a short-term hit by delaying an estimated 5 percent price increase until October, according Les Echos, the French business daily.

“Neither the manufacturers nor the finance ministry has an interest in seeing the volume of sales continue to fall,” Les Echos wrote. Government policy is based on moderate and progressive price rises to encourage smokers to give up, without precipitating a fall in the value of tobacco sales that would also hit tax revenues, according to the newspaper."

The Rest of the Story

This story beautifully illustrates the folly of funding essential government programs using cigarette tax revenue. As I have repeatedly argued, this creates a dependence of the government on continued high levels of cigarette consumption and removes any incentive to substantially reduce smoking.

When cigarette smoking falls dramatically, it reduces revenue and therefore makes essential government programs fiscally insolvent. This creates an ironic incentive for the government to join the tobacco industry in helping to promote continued cigarette smoking. This story is a perfect illustration of this phenomenon.

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