USA Today, best used as a floormat outside of hotel rooms nationwide, ran an article in today’s paper with a seriously misleading headline: Cigarette taxes are gold rush for states. The problem is, they don’t mention a single specific revenue estimate in the entire piece. There’s no disputing that, for example, Utah Gov. Gary Herbert is currently considering allowing a $1 per pack cigarette tax increase to become law this month. What is up for debate is the amount of revenue the state will actually receive from such a tax increase. Recent history shows that revenue projections are often wildly optimistic, and that states relying on higher tobacco taxes to balance their budgets are pursuing a pipe dream (PUN!).
According to ATR’s 2009 State Tax Trends, only 29 percent of the cigarette tax increases over the past decade actually met state revenue projections. The logic is intuitive: When you increase the price of a good, consumers purchase less of it. The real world evidence is plentiful. In 2007 New Jersey raised its cigarette tax by 17.5 cents per pack in an attempt to raise revenue. They predicted the tax would raise an additional $30 million. It actually came up $52 million short – a net loss of $22 million. At least they learned their lesson, right? Wrong. The Philadelphia Inquirer recently floated a $1 per pack increase to help balance the state budget. We try our best to take it easy on poor New Jersey, but they are so eminently mockable.
A couple hundred miles south, Washington, D.C. experienced the same predictable phenomenon. After last year’s 50 cent per pack cigarette tax increase, the city saw a net revenue drop of $7.6 million. DC’s Chief Financial Officer noted in a letter to Mayor Adrian Fenty that "future increases in the tax rate will likely lead to less revenue." So much for USA Today’s mythical goldmine. This directly contradicts a recent report put out by the Campaign for Tobacco-Free Kids which argues that state tobacco tax increases result in automatic windfalls for state governments.
So what’s a tax hiker to do when their credibility on issues of economics is destroyed? Make up things about public health. Organizations like CTFK argue that it is a net positive when revenue declines after a tax increase, because it proves that people are quitting smoking due to prohibitive pricing. Aside from the fact that they are expressly advocating for the elimination of retail jobs, this assertion is incorrect.
According to the Center for Disease Control as cited in the USA Today piece, every 10 percent increase in the price of a pack of cigarettes leads to a 3 to 4 percent drop in cigarette consumption. It is important to note that this number cites only tax-paid sales. In other words, when Ohio raises its cigarette tax by 10 percent, consumption of cigarettes sold legally in Ohio declines 3-to-4 percent. This means some smokers will buy cigarettes smuggled illegally from lower-tax Kentucky or sold over the Internet. This has been a significant problem in Michigan, New Jersey, and California. It also means that some smokers are crossing the border to stock up and save. It’s not hard to envision a scenario in which a low-income smoker in Cincinnati drives across the Ohio River to save $6.50 on a carton of cigarettes. High taxes don’t discourage smoking overall – only the purchase of overtaxed products high tax jurisdictions.
So much for the "gold mine" that is cigarette taxation at the state level. Policymakers considering such tax increases in South Carolina, Washington, Kansas, and New York would be wise to find an economically sound, fiscally sustainable way to balance their budgets. And the Campaign for Tobacco Free Kids might take a word of advice from my colleague Patrick Gleason on how to help the children: cut tobacco taxes.