West Virginia Foolishly Weighs Tobacco Tax Increase
Mountain State smokers beware: Democrat Delegate Don Perdue has (again) introduced legislation to raise the state tax on cigarettes by $1 per pack. In justifying the proposal, Purdue claimed that the state "needs the estimated more than $90 million such a tax increase could generate every year," according to the West Virginia Metro News.
The tax hike would be aimed at raising $90 million per year for the Bureau of Medical Services, with $6 million going into tobacco "control" annually and $1 million per year going to West Virginia University's School of Public Health. Doubling down on his motivations, Delegate Perdue said, "we need the money."
Unfortunately, cities and states who have made the same argument about revenue time and time again have been disappointed at the results. Raising tobacco taxes does not necessarily raise revenue.
Take the Chicago and Illinois examples:
In 2006, Chicago collected $32.9 million in cigarette taxes. After two consecutive tax hikes, revenue fell to $16.5 million last year. Carrie Austin, chairman of the City Council’s Budget Committee acknowledged this reality, stating, “we’ve run sales away.”
In May of 2012 when Illinois raised the cigarette tax by $1-per-pack, nearly doubling the state’s tax rate to $1.98 per pack, the tax delivered $138 million less than expected. What’s more, local small businesses lost tens of thousands of dollars as a direct result as consumers purchasing tobacco across state lines.
To avoid higher cigarette taxes, consumers constantly demonstrate that they are willing to purchase the products in less expensive markets. For West Virginia, that would be neighboring Virginia, whose state tax on cigarettes is 30 cents per pack, the lowest in the nation. For proof that consumers and businesses will purchase cigarettes across state lines, New York provides the best evidence. Nearly 21 percent of cigarettes in the state are smuggled into the state as a direct result of extremely high tobacco taxes, which disproportionately target low income individuals.
Tobacco taxes are an extremely volatile revenue source that prompt future tax hikes. Proponents of cigarette taxes neglect economic realities. To argue that a cigarette tax will increase revenues while decreasing the number of people buying cigarettes is absurd. When prices increase, consumption declines, taking revenue with it.
Delegate Purdue's proposed tax hike will do little to solve West Virginia's budget shortfalls. It will hurt Mountain State small businesses and when tobacco sales fall, resulting in less revenue for the state, West Virginia legislators will again be debating what to do about the state's empty coffers.