[gruez]

Suppose the following price breakdown for a pack of cigarettes:

    cost: $3
    profit: $1
    tax: $1
    total price: $5

The government decides to increase the tax by $1, now it's

    cost: $3
    profit: $1
    tax: $2
    total price: $6

As you can see, the total price went up $1, but the tobacco company's per-unit profit is the same. They can increase the price by more than the tax (eg. hiking the price by $1.5 rather than $1), but that's equivalent to hiking the price $0.5 without an associated tax increase, which they can do at any time.

[random314]

Let's say a competitor shows up who manufactures cigarettes at $1.

At a lower tax rate of $1 his cigarette is $3 vs $5.

But at a higher tax rate of $3, it is a $5 vs $7 customer price.

In absolute terms the price difference is the same. However, consumers think in terms of percentages for cheaper items.