(FORTUNE Magazine) – Engendering dismay among his libertarian friends, your servant has occasionally entertained the case for increased cigarette taxes. Now risking additional fuming (mainly metaphorical) at the Cato Institute, he returns to this subject, which is hot indeed in Washington. It seems clearer every day that some kind of per-pack excise tax on cigarettes will be part of this year's deficit-reduction deal. One reason for so supposing is that tobacco taxes now seem to be uniquely popular. A recent Harris poll had 74% of the public favoring an increase of $1 per pack to pay for health care reform. Even in burleyland, they now want to tax cigarettes: A Louisville Courier-Journal poll of Kentuckians shows 60% for a tax increase, and when you limit the survey to the 25 counties with the largest tobacco crops, that figure drops only to 57%. The National Journal reports that Representative Charles Rose of North Carolina, known in the House as ''Mr. Tobacco,'' now glumly accepts that some increase is inevitable. Less clear is how large the tax increase will be. Right now the federal tax is 24 cents a pack. Erstwhile presidential hopeful Paul Tsongas has been proposing to add on another 24 cents. Senator Bill Bradley of New Jersey wants an increase of 76 cents (i.e., making the tax $1). The American Cancer Society has been plugging an increase to $2 a pack, and a chap named Donald Fitch recently wrote an article in the San Francisco Chronicle talking up $4 whilst noting that the present federal tax is the lowest in the industrialized world. To be sure, a lot of countries with factories do not have federal systems in which states add on their own cigarette taxes. The case for an excise tax on cigarettes is easy to grasp: A higher tax will both increase revenues and improve people's health. Yet the present discussion is muddled because the authority figures proposing tax increases are not letting us know which of the two values they wish to maximize and probably don't know themselves. If reduction of smoking is the governing priority, then the American Cancer Society's $2 proposal is plainly inadequate, as is Mr. Fitch's $4. Canada's stiff cigarette taxes result in retail prices of $5.50 to $6.50 per pack, yet 5,800,000 Canadian smokers are still hanging in there. Logically, the ACS should be supporting a tax of $1 million per pack. Wait. Why let Bill Gates pick up bad habits? Let's go for $1 billion. If our primary goal is not better health but maximizing federal revenues, the appropriate tax would be lower. We believe that the price-elasticity studies reported in this space in 1989-90 -- studies gauging the long-run relationship between cigarette prices and cigarette demand -- are still the best available. Performed principally by Michael Grossman of the National Bureau of Economic Research, the studies were then pointing to a revenue- maximizing tax increase of 90 cents a pack. With Professor Grossman's help, we have now updated the calculation. The updating reflects a certain amount of inflation since 1989, also modest tax increases since then; finally, we must adjust to reflect the fact that we have fewer smokers now than then. Bottom line: We learn that the revenue-maximizing tax today would be $1.26 a pack -- an increase of $1.02 from the present 24 cents. A tax of $1.26 would be expected to boost federal revenues by around $13.5 billion. At least, that would be the long-run effect. In the years just after the tax took effect, the revenue gain would be even greater. Economists would expect many smokers to hang tough at first, and pay the higher price. But eventually a lot of them would become discouraged and join the ranks of those who quit -- which would push revenues down toward $13.5 billion. So an increase of about $1 looks right, and the taxes being proposed by Democrats Tsongas and Bradley look too low. Have we burned all bridges to Cato?