The purported “popularity” of a particular piece of public policy should not be the end-all justification for its passage. Such is certainly the case with efforts to raise taxes on tobacco products. Many state lawmakers have labeled these tax hikes as a win-win for taxpayers and the government because they have bought into the fallacy, perpetuated by organizations like the American Cancer Society Cancer Action Network, that the state revenue impact and affect on consumer behavior justify the targeting of low-income taxpayers with regressive tax hikes. These proponents are wrong.
Oklahomans are the latest victims in the targeted campaign to address a state overspending problem with a cigarette tax hike. And academics have been called in to help make the case for big government legislators. A Northeastern University professor of economics released a misguided report earlier this month bolstering Gov. Mary Fallin’s (R- Okla.) proposed $1.50-per-pack cigarette tax hike. Although the report insists that cigarette tax revenue increases with each hike and remains relatively stagnant in the following years, it fails to address and expand upon all of the consequences that come with tobacco tax increases.
The most vulnerable populations—small businesses and low-income families— are often the most affected by targeted excise tax hikes. Numerous studies suggest that levying higher tobacco taxes on consumers disproportionately harms low-income consumers—many of which expend almost a quarter of their income on cigarettes. Contrary to the claims made by the professor’s report and the American Cancer Society Action Network, these studies also suggest that higher taxes may not deter smoking. That’s because smokers often thwart the blow of this regressive tax increase by smoking fewer cigarettes more intensively, switching to less expensive or discount cigarettes, and by pursuing low or untaxed cigarettes.
As noted in the tobacconomics report, an Oklahoma tax increase would likely incentivize cigarette smuggling and cross-border sales into states like Missouri and Kansas. Yet, the report fails to examine the impact smuggling, as a direct result of the tax hike, has on small businesses in the state. According to the Tax Foundation, when Illinois nearly doubled the cigarette tax rate, cigarette smuggling rate dramatically increased from 1.1 percent to 20.9 percent in the first year. Small businesses like convenience stores in this state lost tens of thousands of dollars as patrons pursued cigarettes in less expensive markets across state lines.
When states become more reliant on tobacco taxes, budgeting also becomes more difficult. Targeted excise taxes have proven to be unsound sources of revenue that could lead to a reduction in tax receipts. For instance, when Illinois almost doubled its cigarette tax in 2012 by raising the tax $1-per-pack; it produced $138 million less than anticipated. Other states have had similar experiences as well, since only three out of the 32 state tobacco tax increases enacted between 2009 and 2013, have met or exceeded tax revenue estimates.
The unintended consequences that come with raising the cigarette tax should be enough to deter those in government from proposing these onerous tax hikes. And unfortunately for consumers and revenue-hungry politicians alike, these tax hikes often only serve as temporary placeholders for more broad-based tax increases down the road. Oklahomans would be wise to disregard this report and look to Illinois for an example as to what their state might become if lawmakers don’t get their act together by reducing spending in the Sooner State.