43 Taxation of Tobacco Products Excise and Sales Taxes. In the US, tobacco is taxed in various ways by federal, state, and local governments. Excise or per unit taxes do not change as prices change, whereas general sales taxes are ad valorem taxes are a fixed percentage of the price and therefore increase or decrease with price changes. One of the advantages of sales taxes over excise taxes, then, is that state tax revenues would increase in the future as cigarette prices increase, even if consumption declines. Use of Taxes.
Tobacco taxes have relatively low administration costs and can generate substantial revenue.
In recent years, increased taxation of tobacco products has been used as a strategy to reduce tobacco consumption and thereby to improve public health. Prior to the 1950s, state taxes on cigarettes were enacted and raised to generate revenues rather than to discourage consumption. However, release of the first reports describing the adverse health effects of cigarette smoking in the mid-1950s and the initial Surgeon General s report on smoking and health in 1964, prompted state governments to actively use cigarette taxes as a principal tool in their campaigns to reduce tobacco use. The Question of Substitution. Although higher cigarette taxes are likely to produce substantial improvements in health, several factors could mitigate the impact of these taxes.