Cigarette and Alcohol Taxes
Cigarette and alcohol taxes are selective sales taxes collected from the producer or seller of a specific good or service. The tax, typically levied as an amount per unit sold (such as per pack of cigarettes or per gallon of beer), is included in the final purchase price and thus passed on to consumers.
These taxes are sometimes called corrective or “sin taxes” because, unlike a general sales tax, they are used in part to discourage use of the product because the choice to use the products has costs both to the user and to other people (e.g., increased health care costs). State and local governments have also begun taxing marijuana and soda in a similar way.
- How much revenue do state and local governments raise from taxes on cigarettes and alcohol?
- How much do cigarette tax rates differ across states?
- How much do alcohol tax rates differ across states?
- Further reading
State and local governments collected $18 billion in revenue from tobacco taxes and $16 billion from alcohol taxes in 2015. Both amounts totaled less than 1 percent of state and local general revenue. State taxes account for almost all of this revenue. States collected 97 percent of cigarette tax revenue and 87 percent of alcohol tax revenue.
Tobacco tax revenue is overwhelmingly from taxes on cigarettes, but states also tax other tobacco products, such as chewing tobacco and smokeless tobacco. Consumption of these products and the resulting revenue are very small.
Alcohol revenue comes from both alcohol taxes ($7 billion) and government-owned liquor stores revenue ($9 billion). Twenty-one states collected revenue from government-run liquor stores, generating revenue through various taxes, fees, price mark-ups, and net profits.
All states tax cigarettes, but rates vary significantly. Cigarette taxes are typically paid per pack. In 2017, Missouri imposes the lowest state cigarette tax rate ($0.17) and New York has the highest ($4.35). Five states had cigarette tax rates below $0.50 per pack in 2016: Georgia, Missouri, North Carolina, North Dakota, and Virginia. In contrast, eight states had cigarette tax rates of $3 or higher: Connecticut, Hawaii, Massachusetts, Minnesota, New York, Rhode Island, Vermont, and Washington.
In Alabama, Illinois, Missouri, New York, Tennessee, and Virginia, local governments may impose an additional cigarette tax. Local cigarette tax rates range from $0.01 in Alabama and Tennessee to $4.18 in Chicago, Illinois (county tax plus city tax). New York City’s cigarette tax is $1.50 per pack. Some states and cities levy their sales tax on top of cigarette price (excise tax included); others build their sales tax into their excise tax rate.
Many states are now also considering taxing electronic cigarettes; the District of Columbia (DC), Kansas, Louisiana, Minnesota, and North Carolina have already passed such laws.
Alcohol taxes are generally paid at the wholesale level, so the cost of the tax is already incorporated into the retail price paid by the consumer. The excise taxes are per gallon rather than a percentage of the final price; beer, wine, and liquor typically have different tax rates.
All 50 states and DC tax alcohol, but states have different tax rates for different types of alcohol: Per gallon tax rates range from $0.02 in Wyoming to $1.29 in Tennessee on beer, $0.20 in California to $2.50 in Alaska on wine, and $1.50 in Maryland and DC to $14.27 in Washington on spirits. Some states, such as New Hampshire and Pennsylvania, do not tax wine and liquor but raise revenue from these products by only allowing them to be sold at state-run liquor stores.
In addition to the excise tax, many states levy a sales tax on the final purchase price of alcohol, and some states and cities have special sales tax rates for alcohol. For example, DC has per gallon taxes on beer ($0.09), wine ($0.30), and liquor ($1.50) built into the retail price of alcohol. The city then levies an additional 10 percent alcohol sales tax on the final purchase price.
Should We Tax Internalities Like Externalities?
Donald Marron (2015)
How Should Governments Use Revenue from Corrective Taxes?
Adele C. Morris and Donald Marron (2016)
Do Alcohol Excise Taxes Reduce Motor Vehicle Fatalities? Evidence from Two Illinois Tax Increases
Robert McClell and John Iselin (2017)
States should answer a few questions before taxing e-cigarettes
Richard C. Auxier (2016)
A Trump crack down on legal marijuana would hurt state budgets
Richard C. Auxier (2017)