Altria Group, Inc. (MO): Do Cigarette Taxes Really Work?

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The federal government has taxed tobacco products since 1794, although the first state tax wasn’t implemented until Iowa passed a bill in 1921. Today, every state in the union as well as the District of Columbia, Puerto Rico, Guam, and Northern Marianas institute a tax on cigarettes. This is likely no surprise. If you have tried to buy a pack of cigarettes lately, then you know it is a pricey purchase. Unfortunately for smokers, cigarettes don’t appear to be getting cheaper anytime soon.

Altria Group Inc (NYSE:MO)

Since 2002, states and territories have increased cigarette tax rates at least 105 times. Here’s where they stand for summer 2013.

Source: Campaign for Tobacco-Free Kids.

These are in addition to the $1.01 federal tax tacked on per pack — up from just $0.39 in 2009 — not to mention city taxes in several metropolitan areas. New York City and Chicago residents will be paying $5.85 and $5.66, respectively, per pack in state and local taxes this summer. You may be wondering if all of these measures actually amount to a reduction in smoking or enhanced public health — presumably the targeted end result — or are just an easy revenue source for Uncle Sam. Before we question the effectiveness of cigarette taxes, let’s take a look at what is at stake.

Health effects of smoking
There is really nothing novel here. We are taught from an early age that smoking cigarettes can cause serious health problems. The Center for Disease Control hits home with these six statistics.

  1. Smoking accounts for approximately 443,000 deaths in the United States each year. That amounts to 20% of all deaths and more than HIV, illegal drug use, alcohol use, motor vehicle accidents, suicide, and murders combined.
  2. About 90% of lung cancer deaths in men and 80% in women can be attributed to smoking.
  3. Smoking increases your risk of developing coronary heart disease by two to four times, stroke by two to four times, lung cancer (men) by 23 times, and lung cancer (women) by 13 times.
  4. The following cancers have been linked to smoking: acute myeloid leukemia, bladder, cervix, esophagus, kidney, larynx, lung, oral cavity, pancreatic, pharynx, and stomach.
  5. In the five years from 2000-2004, smoking added an estimated $193 billion to health-related economic losses in the United States.
  6. Each year, Americans lose a cumulative 5.1 million years of life from cigarettes.

Given the health and economic consequences of smoking, it is easy to see why federal, state, and local governments would set out to curb tobacco consumption. But do cigarette taxes really work?

Survey says…
The surgeon general releases annual reports on tobacco use every few years. In the 2000 report, the office maintained that a 10% increase in cigarette prices results in a 3%-5% reduction in consumption. This was backed up by an overall decline in smoking from 2005-2011 across several groups, including a 22.5% fall among those ages 18 to 24 years old. A separate study conducted by the New York Department of Health in 2011 determined that smoking rates in the state — where consumers face the stiffest taxes in the nation — fell 20% from 2003-2004 to 2009-2010.

The evidence suggests that cigarette taxes do in fact curb consumption.

However, you would be hard-pressed to find any connection between falling smoking prevalence and share performance at Reynolds American, Inc. (NYSE:RAI), Lorriland, Phillip Morris, and Altria Group, Inc. (NYSE:MO). These companies are some of the best performers in the past decade. In fact, Altria Group, Inc. (NYSE:MO) is the best-performing stock of the last half-century!

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