MODELING THE FEDERAL REVENUE EFFECTS OF PROPOSED 

CHANGES IN CIGARETTE EXCISE TAXES 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

October 19, 2007 

JCX-101-07 
i 

CONTENTS 

Page

OVERVIEW ................................................................................................................................... 1 

A. Modeling Approach ............................................................................................................ 3 

B. The Current-Law Baseline.................................................................................................. 4 

C. The Revenue Effect of Increasing the Federal Excise Tax on Cigarettes........................... 6 
1 

OVERVIEW 

H.R. 976, the “Children’s Health Insurance Program Reauthorization Act of 2007,” 

recently vetoed by the President, raises the Federal excise tax rate applied to cigarettes from 

$0.39 per pack to $1.00 per pack, and makes comparable increases in the rates applied to other 

tobacco products.1

 This pamphlet describes the economic modeling that the staff of the Joint 

Committee on Taxation (the “JCT staff”) undertook to assess the revenue effects of these 

tobacco excise tax increases. 2

A JCT staff revenue estimate is an estimate of the increase or decrease in future Federal 

receipts expected to result from the enactment of a proposed change to the Internal Revenue 

Code, when compared with the future Federal receipts projected to be received under present 

law. Under relevant budget rules, the JCT staff’s comparison of projected future receipts under 

the new legislation and under current law covers the “estimating window” – the ten years 

following the year in which the new proposal is assumed to be enacted. The starting point for 

JCT staff revenue estimates is the Congressional Budget Office’s (“CBO”) revenue “baseline,” 

which projects estimated Federal receipts from all sources for the same ten-year period. 

In preparing every revenue estimate, the JCT staff identifies the new economic incentives 

faced by taxpayers as a result of the proposed change in law. The JCT staff then considers 

taxpayers’ likely behavioral responses to the new tax environment in light of those incentives. 

This exercise of predicting behavioral responses to new tax legislation frequently is the 

most challenging and time-consuming aspect of preparing a revenue estimate. In every case, the 

JCT staff must first build from CBO baseline data a more detailed baseline for the current law 

tax provision in question. Both CBO and JCT staff baseline estimates reflect long-term 

economic, social, and population trends, to the extent those trends will affect tax revenues. In 

the case of tobacco excise taxes, for example, the construction of a baseline requires modeling 

the projected long-term decline in the percentage of the population that smokes, among other 

factors. 

Once a detailed baseline of projected revenues under current law has been developed, the 

JCT staff must identify all the plausible taxpayer reactions to the new tax regime, from simple 

acceptance of the new rules, to alternative tax planning strategies or substitutions of goods or 

services, to outright evasion (taking into account, of course, the same long-term economic, 

social, population trends that were relevant to establishing the baseline). Finally, the JCT staff 

must assign both probabilities and projected revenues to each of those possible reactions, and 

from those estimates in turn calculate the estimated difference in revenues anticipated under the 

 1

 For a complete explanation of the tax provisions of H.R. 976 see Joint Committee on Taxation, 

Technical Explanation of the Revenue Provisions of H.R. 976, the “Children’s Health Insurance Program 

Reauthorization Act of 2007,” As Passed by the House on September 25, 2007, (JCX-91-07), September 

26, 2007. 

2

 This document may be cited as follows: Joint Committee on Taxation, Modeling the Federal 

Revenue Effects of Proposed Changes in Cigarette Excise Taxes, (JCX-101-07), October 19, 2007. This 

document is also available on the web at www.house.gov/jct. 
2 

change in law, when compared to the revenues that we would have expected to be collected 

under the baseline (i.e., under current law). 

By increasing the tobacco excise tax, H.R. 976 will raise the cost of tobacco products to 

the consumer. Our research pointed to two important behavioral responses to this effective price 

increase for a pack of cigarettes that we needed to incorporate into our estimate of the expected 

revenue consequences of H.R. 976.3

 First, the number of smokers will decline more rapidly than 

would have been the case under our baseline predictions. Second, the number of cigarettes 

purchased by each smoker also will decline more rapidly than would have been the case in the 

absence of the legislation. In preparing our detailed revenue estimate, we also considered other 

possible behavioral reactions to higher tobacco excise taxes (for example, the possibility of 

increased tobacco excise tax evasion). 

In order to prepare our revenue estimate for H.R. 976, we therefore constructed a detailed 

baseline using current-law tobacco excise tax rates for smoking participation (the number of 

smokers in the United States) and smoking consumption (the number of cigarettes purchased by 

each smoker) for each of the next ten years (the relevant estimating window). We then repeated 

that exercise using our predictions of how the tax increase contemplated by H.R. 976 would 

change those two key behavioral determinants. The difference between the two figures yielded 

our revenue estimate. 

As a result of this analysis, the JCT staff estimates that the increase in the excise tax on 

cigarettes from $0.39 per pack to $1.00 per pack will reduce by 1.9 million the number of 

individuals who choose to smoke in 2017. We further estimate that those smokers will decrease 

their consumption of cigarettes by four percent. Our estimate of the actual revenues to be 

collected as a result of the proposed change in cigarette excise taxes incorporates the 

combination of these two behavioral components. 

Our revenue estimate for H.R. 976, like all JCT staff revenue estimates, is “dynamic,” in 

that we explicitly considered anticipated behavioral responses to the new legislation. Again like 

other JCT revenue estimates, our estimate for H.R. 976 did not take into account the legislation’s 

possible secondary non-tax consequences for Federal government spending (e.g., the effects on 

Medicare costs of a population where the percentage of smokers declines more rapidly than 

otherwise would be the case), or “macroeconomic” consequences (the effect on Gross National 

Product of increased tobacco excise tax revenues). In light of the size of the GNP of the United 

States (some $13.2 trillion in 2006), the JCT staff believes that a “macroeconomic” analysis of 

H.R. 976 would produce essentially identical results to those reported by us.4

The remainder of this pamphlet describes both our methodology and our revenue estimate 

in detail. We welcome comments from analysts who have studied markets for tobacco products. 

 3

 This pamphlet focuses on cigarettes, to the exclusion of other tobacco products, because 

approximately 96 percent of tobacco excise tax revenues come from sales of cigarettes. 

4

 For more details on macroeconomic revenue estimating, see Joint Committee on Taxation, 

Macroeconomic Analysis of Various Proposals to Provide $500 billion in Tax Relief, (JCX-4-05), March 

1, 2005, (http://www.house.gov/jct/x-4-05.pdf). 
3 

A. Modeling Approach 

A change in the Federal excise tax on cigarettes affects cigarette consumption through 

two avenues. By raising (or lowering) the cost of tobacco products to the consumer, an excise 

tax increase (or decrease) affects the decision whether to smoke and the decision of how much to 

smoke conditional upon deciding to smoke. For example, an increase in the price of cigarettes 

resulting from an increase in the excise tax may lead some individuals to not become smokers, or 

induce some current smokers to give up smoking. 5 

Among individuals who choose to smoke, a price increase may induce some individuals 

to reduce their consumption of cigarettes, and in some cases it may lead some individuals to 

purchase untaxed, or “black market,” cigarettes. The JCT staff’s revenue estimates reflect the 

possibility of increased evasion; that calculation is embodied in our estimate of the consumption 

of “taxed” cigarettes (in contrast to all cigarettes). 

Because of these behaviors, the JCT staff employs a two-step procedure that first 

estimates the percent of the adult population that smokes and then estimates the quantity of 

tobacco products that smokers consume. Our model considers such factors as price, income, and 

smoking restrictions as determinants of the decision as to smoke and the decision of the quantity 

to smoke by those who choose to smoke.6

In the first step of our two-step model, the JCT staff estimates the percentage of the 

population that will choose to smoke cigarettes conditioned on the price of cigarettes, household 

income, and other variables. In this first step, we assume that as prices (including any excise 

taxes) increase, the percentage of the population that chooses to smoke will decline. 

In the second step, we project the aggregate quantity of taxed cigarettes that will be 

consumed annually by those individuals who choose to smoke. The analysis estimates cigarette 

consumption by smokers as depending upon the price of cigarettes, household income, and other 

variables. In this second step, we assume that as prices (including any excise taxes) increase, 

smokers will reduce their consumption of taxed cigarettes. 

 5

 See for example, Grossman, Michael, J. L. Sindelar, J. Mullahy, and R. Anderson, 1993. 

“Alcohol and Cigarette Taxes,” Journal of Economic Perspectives, vol. 7, 1993, pp. 211-222, and 

Farrelly, Michael C., J. W. Bray, T. Pechacek, and T. Wollery, “Response by Adults to Increases in 

Cigarette Prices by Sociodemographic Characteristics,” Southern Economic Journal, vol. 68, 2001, pp. 

156-165. We obtained much of our historical information on cigarette prices and tax-paid consumption 

from “The Tax Burden on Tobacco,” published annually by the consulting firm Orzechowski and Walker. 

6

 If a change in the excise tax applicable to cigarettes were made in the absence of commensurate 

changes in other tobacco products, the model would also incorporate the potential for some tobacco users 

to substitute other tobacco products for cigarettes. 
4 

B. The Current-Law Baseline 

According to the Alcohol and Tobacco Tax and Trade Bureau, total tobacco excise tax 

collections have been falling since fiscal year 2003,7 from $7.9 billion in that year to $7.7 billion 

in fiscal year 2006. The CBO projects total tobacco excise tax receipts to decline from $7.5 

billion in 2007 to $6.7 billion in 2017. 

Our baseline assumptions for fiscal year 20098

 are that approximately 18.9 percent of the 

240.6 million U.S. residents age 16 and over smoke.9

 This yields a smoking population of about 

45.4 million people. 10 Our model predicts that smokers, on average, will consume about 400 

packs of cigarettes annually. Thus, we forecast that under present law about 18.2 billion taxable 

packs of cigarettes will be sold in fiscal year 2009. Present law provides for a Federal excise tax 

of $0.39 per pack of cigarettes. Therefore, these projections on the percentage of smokers and 

rates of cigarette consumption are consistent with the CBO’s baseline receipts forecasts of 

approximately $7.1 billion in Federal cigarette excise tax revenue in fiscal year 2009.11 

We forecast that, under present law, the smoking rate will decline by roughly 0.3 percent 

per year to 16.6 percent in 2017. The projected 2017 population of U.S. residents 16 and over is 

258 million. Thus, we expect that without any changes to Federal excise tax rates there will be 

42.6 million smokers in 2017. Furthermore, we expect each of these smokers to consume about 

387 taxable packs of cigarettes per year, yielding total projected fiscal year 2017 taxable 

cigarette sales of 16.5 billion packs. These projections on the percentage of smokers and rates of 

cigarette consumption in 2017 again are consistent with the CBO’s baseline receipts forecasts of 

approximately $6.4 billion in fiscal year 2017. 

 

 7

 The Balanced Budget Act of 1997 (Pub.L.No. 105-33, sec. 9302) increased Federal excise 

taxes on tobacco in two stages, effective at the beginning of calendar years 2000 and 2002, so that years 

before fiscal year 2003 are not strictly comparable. 

8

 The proposed tax increases of H.R. 976 would be effective January 1, 2008. The JCT staff 

reports revenue effects on a fiscal year basis. The Federal fiscal year commences October 1. The 

discussion above starts with fiscal year 2009 in order to include a full-year effect of the proposed tax 

increase. 

9

 All population estimates are calculated from data provided by the Population Projections 

Branch of the U.S. Census Bureau. 

10 Due to the rounding of large numbers the reader may not be able to reproduce the exact 

arithmetic results presented in this pamphlet. 

11 The CBO provides the JCT staff with estimates of Federal excise revenue attributable to the 

following tobacco products: cigarettes, cigars, cigarette papers and tubes, smokeless tobacco, and pipe 

roll-your-own tobacco, and imports. The JCT staff apportions the imports to the other categories and 

attempts to separate large and small cigars, pipe and roll-your-own-tobacco, and snuff and chewing 

tobacco using information supplied by the Alcohol and Tobacco Tax and Trade Bureau. 
5 

This decline in smoking participation in our baseline is a continuation of a long-term 

trend. There are many reasons for this long-term decline. A large portion is certainly due to the 

greater recognition of the health dangers associated with the consumption of tobacco products in 

general and especially cigarettes. Further, in the mid-1980s, States began to increase State 

excise taxes on cigarettes that has the effect of lowering consumption. Table 1, below, shows 

smoking rates over the last 40 years. 

Table 1.–Historical Smoking Rates 

Year 

Smokers as a Percentage of Population 

18 Years of Age and Older 

1965 42 

19741 37 

1985 30 

1995 25 

2005 21 

 Source: National Center for Health Statistics 

 1

 The smoking rate for 1975 is not listed. 
6 

C. The Revenue Effect of Increasing the Federal Excise Tax on Cigarettes 

The JCT staff assumes that increases in the Federal excise tax will be reflected fully in 

higher prices to the consumer. The estimating questions posed by the proposed tax increase of 

H.R. 976 are (1) what effect will the resulting higher price of cigarettes have on the incidence of 

smoking in the U.S. population and (2) what effect will the resulting higher price of cigarettes 

have on the consumption of cigarettes by those individuals who choose to smoke. 

Step one.–As noted above, the JCT staff estimates the percentage of the population that 

will choose to smoke cigarettes conditioned on the price of cigarettes, household income, and 

other variables. We estimate that the increase in the excise tax from $0.39 per pack to $1.00 per 

pack will have a modest effect upon both the smoking participation rate and the consumption of 

tobacco products per smoker.12 We estimate that the 2009 smoking rate will be 17.9 percent, 

representing about 43.1 million smokers. This is a decrease of about 2.3 million smokers, or five 

percent, from the 45.4 million projected smokers in the absence of changes to Federal tobacco 

excise tax rates. By 2017, we estimate the smoking rate given the proposed tax increase to be 

15.8 percent, a decrease of about four percent relative to our baseline projections, reducing by 

1.9 million, to 40.7 million, the currently projected 42.6 million smokers. 

Step two.–As noted above, the JCT staff estimates the aggregate quantity of taxed 

cigarettes that will be consumed annually by those individuals who choose to smoke. The 

analysis estimates cigarette consumption by smokers as depending upon the price of cigarettes, 

household income, and other variables. We estimate the average consumption of cigarettes in 

2009 after enactment to be 381 packs per smoker per year, a decline of almost five percent from 

the baseline forecast. We estimate that the average consumption of cigarettes in 2017 would be 

370 packs per smoker per year, a decrease of about four percent. 

Combined effects.–Combining the effects of a projected number of smokers and the 

number of cigarettes consumed after the tax increase, we estimate taxable sales of cigarettes to 

total 16.3 billion packs for fiscal year 2009 and 14.9 billion packs for fiscal year 2017. Figure 1, 

below, shows projected sales of taxable cigarettes under both present law and given enactment of 

the proposed tax increase. 

 12 Because the tax rate would be fixed at a nominal value of $1.00 per pack throughout the period 

2008-2017, the real, inflation adjusted, tax rate declines throughout the period. As a consequence, the 

effect of the tax increase on individual behavior is greater in the earlier years of the period than in later 

years of the period. 
7 

Figure 1.– Predicted Taxable Packs of Cigarettes Sold Under Present Law

and Assuming Enactment of H.R. 976

14.0

15.0

16.0

17.0

18.0

19.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Fiscal Year

Billions of Packs

Baseline Packs

Proposal Packs

Affect on Federal receipts.–As stated above, we estimate taxable sales of cigarettes to 

total 16.3 billion packs for fiscal year 2009 and 14.9 billion packs for fiscal year 2017. At a tax 

rate of $1.00 per pack this produces $16.3 billion in gross Federal receipts in 2009 and $14.9 

billion in gross Federal receipts in 2017. 

While the gross receipts from the excise tax are as estimated above, because smokers are 

paying more in aggregate to smoke, they consume less of other goods and services in the 

economy. This implies that incomes of producers and workers in other sectors will decline. As 

incomes in other sectors decline, receipts from income and payroll taxes decline. Consequently 

the net effect of an excise tax increase is less than the gross receipts carved from the incremental 

excise tax. The difference between the change in excise tax receipts and the change in total 

Federal tax receipts is referred to as the “income and payroll tax offset.” This offset may be 

considered to be the average marginal tax rate on factors of production. The JCT staff applies a 

25 percent offset to tobacco excise tax estimates to account for this effect.13

 13 For a more thorough description of the income and payroll tax offset, see Joint Committee on 

Taxation, Overview of Revenue Estimating Procedures and Methodologies Used by the Staff of the Joint 

Committee on Taxation, (JCX-1-05), February 2, 2005. 
8 

As a consequence of the effect of the income and payroll tax offset, we estimate that in 

2009 net Federal receipts from the cigarette excise tax will be approximately $12.2 billion. Our 

baseline projection for cigarette sales is 18.2 billion packs of cigarettes sold. At the present-law 

tax rate of $0.39 per pack this yields gross revenues of $7.1 billion, and after accounting for the 

income and payroll tax offset, a net revenue of approximately $5.3 billion. The difference 

between the net Federal revenue under the proposal and the net Federal revenue under the 

baseline is our estimate of the increase in Federal revenues of $7.0 billion for fiscal year 2009. 

Similarly, in fiscal year 2017, as a consequence of the effect of the income and payroll 

tax offset, we estimate that in 2017 net Federal receipts from the cigarette excise tax will be 

approximately $11.2 billion. We estimate cigarette sales would be 16.5 billion packs if there 

were no changes in present law. At the present-law tax rate of $0.39 per pack, we estimate gross 

cigarette revenue under present law to be $6.4 billion, and after accounting for the income and 

payroll tax offset, a net revenue of approximately $4.8 billion. The difference between the net 

Federal revenue under the proposal and the net Federal revenue under the baseline is our 

estimate of the increase in Federal revenues of $6.4 billion for fiscal year 2017. 

Table 2, below presents the revenue effects attributable to an increase in the tobacco 

excise tax from $0.39 per pack to $1.00 per pack, as well as the estimated revenue effects of the 

proposed increases in the tax rates applicable to other tobacco products in H.R. 976. 
9 

Table 2.–Estimated Revenue Effects of the Tobacco Excise Tax Increases 

Contained In H.R. 976 

Fiscal Years 

[Billions of Dollars] 

Item 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008-12 2008-17

 

Small cigarettes 5.7 7.0 6.8 6.7 6.6 6.6 6.5 6.5 6.4 6.4 32.7 65.1 

Large cigarettes... --- --- --- --- --- --- --- --- --- --- --- --- 

Small cigars........ 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.7 

Large cigars........ 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 2.0 4.0 

Cigarette papers 

and tubes........... [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] 

 

Snuff................ [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] 0.2 0.4 

Chew............... [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] 0.1 

Pipe tobacco....... [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] 0.1 

Roll-your-own 

tobacco............. 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.6 

Expand Definition 

of roll-your-own 

tobacco.............. 

[1] [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] [1] 

 Total............... 6.2 7.6 7.4 7.3 7.2 7.2 7.1 7.1 7.0 6.9 35.7 71.0 

 

NOTE: Details may not add to totals due to rounding. 

[1] Is a gain of less than $50,000,000.