Pennsylvania legislators and Governor Wolf are working to finalize a budget totaling over $31 billion. With the new fiscal year beginning at the end of next week, a deal must be reached soon in order to avoid another budget impasse. Republican lawmakers who hold majorities in both chambers of the state legislature have made it clear they will not support the income and sales tax increases that were part of Wolf’s budget proposal. Today, Gov. Wolf conceded that he has given up on his efforts to hike income and sales taxes this year. The debate over whether or not to raise taxes in order to balance the budget now focuses on the pending proposal to hike taxes on tobacco products, electronic cigarettes, and vapor products.
The Commonwealth Foundation recently highlighted the following flaws with balancing the budget on the backs of smokers and vapers:
1. They hit the poor the hardest. Proponents of higher taxes often describe spending reductions as “balancing the budget on the backs of poor people.” Yet, that’s exactly what cigarette tax hikes will do.
As professors Kevin Callison and Robert Kaestner make clear in a Cato Journal article, a tax increase will hurt the poor most of all, as a large percentage of their household income is spent on cigarettes:
“From 2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000.”
When two Cornell University economists studied the effects of this “sin” tax, they discovered an unintended consequence: larger food stamp rolls. This should not come as a surprise. Cigarette taxes are regressive and may very well push those around the poverty line into government programs.
2. Tobacco taxes are an unstable source of revenue. The IFO predicts revenue from the current cigarette tax will fall by 3.6 percent in fiscal year 2017.
New York, which has the highest cigarette taxes in the country, saw revenue drop by $400 million over the past four years. While smoking did decline, it cannot account for the dramatic decrease in revenue. Smokers simply turned to the black market or neighboring states for cigarettes.
3. Higher taxes incentivize smuggling. Under the Republican proposal the state’s tax rate will be higher than four of our six bordering states, spiking cross-border shopping and cigarette smuggling.
According to the Mackinac Center, a 62.4 percent tax hike on cigarettes would spike smuggling rates from zero to 20.3 percent. To put it another way, approximately one of every five cigarettes consumed in the commonwealth would be illicit. Not surprisingly, the overwhelming majority of these cigarettes would come from distant, low-tax states like Virginia or the Carolinas.
Americans for Tax Reform recently sent the following letter to Pennsylvania legislators urging them to reject calls for higher taxes, and reminding them that Pennsylvania’s tax burden is already too high and puts the state at a competitive disadvantage:
June 17, 2016
To: Members of the Pennsylvania Legislature
From: Americans for Tax Reform
Re: Standing strong against calls for higher taxes
Dear Members of the Pennsylvania Legislature,
On behalf of Americans for Tax Reform and our supporters across Pennsylvania, I encourage you reject calls to raise taxes to balance the budget. As you work to finalize a budget in the coming weeks, I ask that you keep Pennsylvania taxpayers in mind, along with the following facts:
- Pennsylvania is home to the 15th highest tax burden in the nation. Taxpayer in the Commonwealth pay 10.2% of their income to state and local tax collectors on average, which is higher than the national average of 9.9%.
- Most states have a better business tax climate than Pennsylvania. According to the non-partisan Tax Foundation, 31 states have a better business tax climate than the Keystone State.
- Pennsylvania has the nation’s 2nd highest corporate income tax. That, coupled with the U.S.’s highest in the world federal corporate tax, handicap the ability of Pennsylvania businesses to compete in the global economy.
- Pennsylvania taxpayers have been hit with over 20 federal tax increases over the last seven years. The last thing Pennsylvanians need right now, especially in the midst of great economic uncertainty, is have politicians in Harrisburg take more of their hard-earned income through higher state taxes.
In light of these fact, I urge you to reject pressure to vote for higher taxes to balance the budget. The problem is not with Pennsylvanians being taxed to little, it’s state government spending too much. ATR will be following these issues closely and working to educate Pennsylvania voters as to how representatives and senators in Harrisburg vote on these important matters. If you have any questions or if ATR can be of assistance, do not hesitate to contact me or Patrick Gleason, ATR’s director of state affairs, at 202-375-3694.
Americans for Tax Reform