Obama’s tax hike on cigarettes leads core CPI increase for April

The federal cigarette excise tax increase passed under the Obama administration earlier this year led to a steep tobacco price increase in April. Will consumers opt to continue to pay the extra dollar and one cent to support their habit? How will the tax affect government revenues? Chief financial analyst Bob Johnson of Morningstar has some answers.
The federal cigarette excise tax increase passed under the Obama administration earlier this year led to a steep tobacco price increase in April. Will consumers opt to continue to pay the extra dollar and one cent to support their habit? How will the tax hike affect government revenues? Robert Johnson of Morningstar Inc. has some answers. (University of Pennsylvania)

BY FELICE BAKER – MEDILL NEWS SERVICE

In spite of the continued declines in the energy and food prices in April, the seasonally-adjusted Consumer Price Index for April registered no change from the previous month, due mostly to a 9.3 percent increase in tobacco prices. The overall CPI declined 0.1 percent in March.

In fact, according to the Bureau of Labor Statistics, more than 40 percent of the 0.3 percent increase in the core CPI, minus food and energy, was due to the increase in tobacco prices resulting directly from the hike in the federal cigarette excise tax to $1.01, which President Obama signed into law on Feb. 4, as part of the State Children’s Health Insurance Plan bill. The law was enacted on April 1, leading to the steep price increase for that month.

The tobacco results for April prompt the age-old supply and demand debate when it comes to the feasibility of taxing vices. Will the effectiveness of the tax hike be thwarted by a budding black market? Or will recession-strapped customers hang in there and pass over the extra buck?

Basically, how will the federal cigarette excise tax affect fiscal revenue?

Bob Johnson, associate director of economic analysis at Morningstar Inc., is pessimistic about the effect of raising cigarette taxes on government revenues.

“Definitely, raising cigarette taxes have not been helpful to revenues in the past,” said Johnson in a phone interview. “There have always been issues about consumers shopping across the border to avoid taxes on discretionary items, or of course, turning to bootlegged alternatives. Cigarettes are usually one of the hardest of all discretionary items to control.”

The increase in core CPI was also buoyed by price increases in medical care (0.4 percent), new vehicles (0.4 percent), and expenses related to lodging away from home (0.5 percent), which Johnson sees as a good sign that deflation, or falling prices, is no longer a worry.

“My general view is that the trend toward deflation is loosening its stronghold, in keeping with an economic decline which is bottoming out,” said Johnson. “In fact, unless the wage rate moves down considerably, I expect to see a 1.0- to 2.0-percent inflationary increase in the coming months.”

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