IN THE NEWS Californians Vote to Triple Cigarette Tax Sacramento, CA- California
ID: 1132869 • Letter: I
Question
IN THE NEWS Californians Vote to Triple Cigarette Tax Sacramento, CA- Californians voted for higher cigarette taxes. Proposition 56, passed with 63 percent of the vote, more than triples the state tax on cigarettes from 87 cents a pack to $2.87 a pack, beginning April 1, 2017. Anti-smoking groups say the higher price will reduce smoking in the state. They foresee the proportion of smokers falling from the current 11.6 percent of the population to as low as 7.1 percent by 2020 ifferent reasons. According to the state's Legislature Analyst's Office (LAO), the additional $2 per pack tax will bringin $1.27-$1.61 Economists are skeptical. Californians now purchase about 800 mlion packs a year. If the new tax billion a year to the state treasury. is to hit the high end of LAO's revenue estimate, Californians will have to continue smoking 800 million packs a year. Yet, the anti-smoking groups foresee a dramatic drop in smoking-as much as 30 percent. Both groups can't be right. The Washington-based Tax Foundation also points out that the tax hike in California will greatly increase cigarette smuggling. At present, about 12 percent of cigarettes smoked in California a smuggled in from lower tax jurisdictions. The Tax Foundation says that rate will jump dramatically once the new tax is in place. That will frustrate both the State Treasurer and anti-smoking advocatesExplanation / Answer
c)
Elasticity = Percentage change in Qty/ Percentage change in Price.
New price of Pack of cigratte = 5+2 = 7.
Percentage change in price = 2/5*100 = 40%.
From the elasticity rule we have
0.8 = percentage change in qty/40%
Percentage change in Qty = 0.8*40% = 32%.
d)
Additional revenue = tax* change in quantity consumed
Current consumption = 800 million packs.
Percentage increase = 100* change in consumption/current consumption
32 = 100*change in consumption/800 million
Change in consumption = 0.32*800 million = 256 million
Additional revenue = 2*256 million = $ 0.512 billion