Why Tax Increases Hurt Taxpayers

Here are some of the way cigarette taxes affect you:

• States often collect far less revenue than projected from cigarette tax increases
  When cigarette taxes go up, smokers increasingly find ways to evade paying the higher prices. They order from online sources, buy from black-market dealers or drive across the border to a neighboring state with lower prices. Not only do those lost sales hurt legitimate store owners, the state loses out on the taxes from those sales. Consequently, states routinely find that they do not collect nearly as much from a cigarette tax increase as they expected. For example, the state of Tennessee has collected $47 million less than projected after a recent tax increase, and New Jersey’s cigarette tax revenues actually decreased between fiscal years 2006 and 2007, despite a cigarette tax increase. As a result, programs that depend on cigarette tax revenue are underfunded.
  
  
• Tax revenue is not always allocated as intended
  Supporters of cigarette tax increases often claim the additional revenue will go toward tobacco use prevention programs. Yet the states have already proven that they will not follow through on this promise.
  
  Each year, the states collect approximately $22 billion from tobacco taxes and the 1998 state tobacco settlement. Although the Centers for Disease Control recommends that a modest 7 percent of this money — $1.5 billion — be spent on prevention programs, the states actually spend less than half of that relatively small amount.
  
  Where have the other billions of dollars gone? Here are just a few of the items that the states have spent settlement money on:
  • In New York: dump trucks, golf carts, a golf course irrigation system, and a new county jail
  • In Virginia: broadband-cable networks
  • In Nevada: upgrading public television stations with DVD technology
  • In Tennessee: balancing the state budget (using four years’ worth of settlement funds)
  • In Wisconsin: offsetting a budget shortfall (municipal bonds were issued, backed by future settlement money)
  • In Alaska: harbor renovation and museum expansion
  • In Kentucky: pasture and weather monitoring for a thoroughbred association
  
  
  
• Higher cigarette taxes increase gang and other organized crime
  An increase in tobacco taxes will escalate an already-thriving underground market, making it more lucrative for gangs and other organized crime outfits to steal, smuggle and funnel black market cigarettes to consumers. In fact, the higher the tax increase, the more lucrative are the illicit profits made by criminals and the less legal profit is made by retailers and wholesalers. Illegal sales also cut into revenue projections by state government.
  
  An increase in illegal tobacco sales also take up the time and resources of law enforcement officers and results in further demands from the public that the state spend more on protection issues.
  
  
• Cigarette sales are an unreliable source of income
  Cigarette sales are declining at a rate of around 2 to 3 percent per year. Contrary to what tax increase proponents say, much of the decrease is not due to smokers quitting, but rather smokers finding alternative ways to buy cigarettes. The bottom line is that cigarette taxes are a very unstable funding source, yet proponents often say they will use the additional revenues to pay for programs such as health care or education. Funding such important programs from a declining revenue source like cigarette sales could lead to future budget shortfalls.
  
  
• Higher cigarette taxes burden low-income and working-class families
  Cigarette taxes are extremely regressive, affecting the poor more heavily than the rich. Because a factory worker pays the same per-pack tax as a wealthy executive, the tax represents a larger portion of the lower-income consumer's budget.
  
  Since most smokers are low- or middle-income Americans, increasing cigarette taxes forces those who can least afford it to shoulder the burden.
  
  Between federal, state and local taxes and tobacco settlement payments, government entities raked in $33 billion from smokers in 2006. Why should just 20 percent of the adult population — most of whom are working-class Americans with families to feed — be forced to pay even more?
  
  
• Higher taxes alone do not prevent youth smoking
  When tobacco taxes are raised, smuggling and theft become more prevalent, enabling more and more adults and youth to obtain cigarettes through unregulated resources.
  
  Higher taxes alone do not prevent youth smoking. Positive peer influence, parental guidance and smoking prevention programs do. Instead of penalizing adults who choose to smoke, government should focus on reducing youth smoking through proven methods.
  
  
• Smokers may go out of their way to purchase less expensive cigarettes
  Studies show that revenues from increased state cigarette taxes often fall short of projections, partially because smokers will go out of their way to purchase less expensive cigarettes via untaxed channels: international web sites, Native-American reservations, and even the black market. In addition, revenue and sales for in-state merchants are lost when smokers travel across borders into states with cheaper cigarette taxes. And local store owners don't lose just their tobacco sales. When customers travel to other stores, they will also make food, gas and beverage purchases at the same place they buy cigarettes. Retailer associations estimate the loss from these extra sales alone is about 20%.
  
  This tax avoidance often leads to state revenue projection losses for both cigarette excise taxes and sales taxes—making tobacco tax increases and inefficient means of creating revenue.