The Price Of Cigarettes In 2009: Where Is The Money Going?

Many smokers are still trying to catch their breath from the wave of federal and state cigarette tax increases that made headlines in 2009 and with good reason. In some parts of the country, such as New York City, where local taxation is strong, the price for a pack of cigarettes is hovering around $10. But just how much of this price can be attributed to the wholesale cost of cigarettes?

A look at the actual numbers paints a pretty clear picture. Whether they like it or not, the truth is that every time a smoker forks over their money to light up, they are actually making a rather generous contribution to federal, state, and local governments.

Here is a brief rundown of all the factors that contribute to the total price of a pack of cigarettes:

• The Factory Price: This is what the cigarette company charges wholesalers and distributors per cigarette pack. According to the Economic Research Service of the U.S. Department of Agriculture, as of June 2008, the average price charged by the major cigarette manufacturers for the top brands was $2.28. However, this does not include a series of cigarette manufacturer price increases that preceded the federal cigarette tax hike in 2009, as well as any promotional reductions by the manufacturer. Taking all of this into account, the average factory price is probably closer to $2.35 a pack.

• The Federal Cigarette Tax: The federal tax rate is tacked on to the price per pack before it reaches the retailer. Currently, the federal tax is holding at $1.01 per pack.

• The State Cigarette Tax: State cigarette taxes are added in at the distributor level. The distributor is usually required to buy state tax stamps and stick them to the cigarette packs prior to shipping them off to retailers.

• Distributor and Retail Mark-ups: This is the amount that distributors and retailers tack on to the price before passing the cigarettes on to customers. Currently, there is no solid data on distributor and retailer mark-ups by state. A rough estimate can be determined, however, by subtracting the factory price and any applicable taxes from the average retail price of a pack of cigarettes in each state.

• State Sales Tax: In most states, a sales tax is added on to the price of a pack of cigarettes at the point of sale to the end customer.

• Local Taxation: Some city, town, and county governments additionally apply sales taxes to the price of a pack of cigarettes

Sources:

1.) State Cigarette Tax Rates & Rank, Date of Last Increase, Annual Pack Sales & Revenues, and Related Data

2.) State Sales, Gasoline, Cigarette, and Alcohol Taxes

3.) Cigarette Tax Increases vs. Cigarette Company Price Increases