BY LAWRENCE J. MCQUILLAN – Faced with yawning budget deficits, state legislators are looking for new revenue sources. Many think hiking cigarette excise taxes is the pain-free answer, but they’re wrong.
This year, Utah and New Mexico have already raised cigarette taxes by $1 per pack and 75 cents per pack, respectively. In 2009, 14 states plus the District of Columbia implemented cigarette-tax hikes. At least 20 states are looking to do likewise in 2010, including Georgia, Kansas, New York, and South Carolina.
Lawmakers claim such tax hikes generate substantial revenue while discouraging smoking. Yet the history of cigarette taxes shows otherwise. Any revenue increases following cigarette-tax hikes have typically fallen well short of projections. When Maryland increased its cigarette tax by $1 per pack last year, Gov. Martin O’Malley promised it would raise $255 million in new revenue. The actual amount was $117 million short of that figure.
Following the District of Columbia’s 50-cents-per-pack hike in October, cigarette-tax revenues are projected to fall by nearly $8 million in 2010. And during the two years since New Jersey increased its tax by 17 cents a pack, the state suffered a $24 million loss in cigarette-tax revenue. These examples are not anomalous.
According to a Chicago research group, just 16 of the 57 state-level tobacco tax hikes implemented between 2003 and 2007 actually met or exceeded the revenue projections. Perversely, cigarette taxes also make state governments dependent on tobacco use. If lawmakers are counting on steadily increasing cigarette-tax revenue to close budget gaps, then they’ll need to recruit more smokers or hope for higher daily smoking rates.
Why don’t cigarette taxes deliver as promised? Some people respond to higher prices by never starting to smoke or by quitting. That’s a healthy decision, but one that individuals can make on their own. Many of those who don’t kick the habit simply go elsewhere to buy cigarettes.
In New York, for example, many smokers shop at local Indian reservations, where cigarettes are sold tax free. District of Columbia residents flout their tax increase by traveling to low-cost neighbors Maryland and Virginia. There is also the “underground economy” for illegal purchases of cigarettes, and with each new tax hike that market grows.
When politicians single-out this politically unpopular industry for further tax hikes, they are trying to balance state budgets on the backs of the poor. Nearly one-third of the nation’s smokers have incomes below the federal poverty line. When cigarette taxes rise, low-income folks bear more of the burden than wealthier people, as the poor have to fork over a higher percentage of their already meager income to purchase a pack.
Proponents of regressive cigarette taxes dismiss concerns about their impact on the poor by citing the costs to the state of treating smoking-related illnesses. But whether cigarette smokers cost the state more money is debatable — some studies suggest that smokers actually cost health care systems less than nonsmokers because they tend to die quicker and younger.
By this logic, cigarette taxes should only recoup the net costs smokers impose on society. But a study in the Journal of the American Medical Association concluded that smokers “pay enough taxes to cover the net costs they impose on others” as far back as 1986. Piling on more taxes simply makes the tax system more unfair. The average state cigarette tax is already $1.38 per pack. And that’s on top of the dollar tax the feds levy.
As the record shows, cigarette tax hikes fail to deliver revenue according to promise, and they punish those who can least afford to pay higher taxes. Politicians’ addiction to cigarette taxes also causes state legislators to avoid better ways of cutting budget deficits and restoring their economies to health such as reducing government spending, lowering taxes, and implementing policies that promote job creation.
Lawrence J. McQuillan, Ph.D., is director of Business and Economic Studies at the Pacific Research Institute. Contact him at LMcQuillan@pacificresearch.org