In February, Arkansas Gov. Mike Beebe signed a law increasing the tobacco tax by 56 cents, bringing the rate to $1.15 per pack. It was estimated that the increase would bring $86 million dollars to the General Fund and the monies were to be appropriated to fund a state trauma system and other health programs. In addition, matching federal Medicaid dollars would be available, amounting to nearly $175 million a year for the programs.

 

But now, in a classic “we told you so” moment, the Department of Finance and Administration predicts that the state will face a $10.3 million drop in tobacco tax collections for fiscal year 2010 starting July 1.

 

Herein lies the fallacy with thinking it would raise $86 million: by discouraging smoking through increasing the cost, the state decreases consumption of the good. This results in less than expected revenues and an under-funded program. In addition, higher tobacco taxes lead to more and more purchases across state lines. Fewer in-state purchases mean fewer dollars in state coffers.

 

In the case of Arkansas, this problem was only exacerbated with the federal excise tax increase on cigarettes by 62 cents a pack which President Obama signed into law back in February. The federal rate now stands at $1.01 per pack -- a rate that is sure to decrease consumption in Arkansas even further.

 

photo credit: onkel wart