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Abstract

This report analyzes some likely effects of the recently passed federal cigarette tax increase. An equilibrium displacement model of the cigarette industry is developed. It includes relationships for / international trade in cigarettes and tobacco, federal cigarette taxes, and market interrelationships between cigarettes and tobacco and other inputs in cigarette manufacturing. A range of values for the demand ru1d supply elasticities is used to examine the sensitivity of the calculations. The major results of this study are: (a) the price of cigarettes will rise by almost the full amount of the tax increase; (b) the cigarette price increase will lead to about a 5 to 6 percent reduction in domestic sales of cigarettes, but some increase in quantities exported will offset domestic sales declines; (c) national distribution of cigarette sales will be altered slightly because relative price increases will be largest where current prices (and state tax rates) are lowest; (d) the effect of the tax increase on the price of domestic tobacco will be small -- even holding the production of tobacco constant -- because of the importance of international trade in cigarettes and tobacco as well as substitution with other inputs; and (e) a reduction of the real support price of tobacco in response to the tax increase will cause a fall in average tobacco quota lease rates.

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