Increasing cigarette taxes lowers the cost of cigarettes
This will not be the most intuitively obvious of contentions but you’ll get it once explained. Increasing the cigarette, or tobacco, tax reduces the price of cigarettes or tobacco. As then is usual enough the lower price leads to more smoking. This is all rather akin to Laffer effects - tax rates can and even will have contrary effects. Add in the varied foolishnesses about controlling that grand substitute for tobacco, vaping, and we gain what is not in fact desired at all, a rise in smoking rates:
Smoking rates in parts of England have increased for the first time in nearly two decades, according to research.
Academics at University College London examined smoking data for more than 350,000 adults in England over an 18-year period. They found that while the proportion of adults who smoke cigarettes, pipes, cigars or other forms of tobacco fell from 25.3% of the population in 2006 to 16.5% in 2024, progress since 2020 has flatlined and in some areas smoking rates are increasing again.
The study, published in the journal Addiction, found that smoking increased 10% in southern England between 2020 and 2024. In contrast, rates decreased by 9.7% over the same period in the north.
It’s clearly possible to observe that more people are doing what those people wish to do which is, obviously, a good thing. But it’s also true that the entirety of public policy is intended to drive those numbers the other way. Intended to that is, not does.
As Chris Snowdon has noted over at the IEA. The black market in tobacco is now vast. Income from tobacco taxation is falling as those rates move ever skyward - clearly a Laffer Peak has been passed. But, obviously enough, if the aim of policy is to reduce smoking then that would be fine. But smoking isn’t reducing. As the Guardian, Snowdon and the academics at UCL are showing.
So what’s happening here, what perversion of all that is good and holy is this?
The answer is that people will, if they want to, break the law. That black market in tobacco and cigarettes is now vast. Only the most painfully timid could not find a supplier of non-duty paid ciggies or baccy within an hour in any city of town in Britain. Where prices are - so we’re told of course, so we’re told - about half the posted legal and tax paid price. It’s even possible that “Manchester”, a brand that doesn’t even exist in tax-paid form, is now the leading seller.
The rise in taxation has led to a creation of that truly vast black market. Which is substantially cheaper. As social mores change given the costs of legal supply we end up with widespread avoidance of the law. Evasion even.
Push tax rates on tobacco too high and tobacco actually becomes cheaper. Because people will turn to the black market. As people are.
Of course, nobody could have known this for there never has been a test of the proposition. The US didn’t spend 1920 to 1933 testing prohibition to destruction, oh dearie us no.
We end up with that synonym for the Laffer Curve as applied to sin taxes. Push them too high and the incidence of the sin increases. Because an efficient black market will spring up and so reduce, in real terms, the price of what is being taxed.
There is also that wider lesson to be learned. Yes, we agree, it’s entirely possible for government to pass all sorts of laws to achieve such wondrous things. There’s no great evidence that the population’s going to do what the laws, the government say. Not if they don’t want to. We find that a great comfort.
Tim Worstall