Why Cigarette Tax Increases Are a Bad Idea

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...
  
  
  
  • New Jersey was the first state to experience prolonged revenue reductions after an SET increase. The state increased the state excise tax (SET) on cigarettes by 17.5 cents per pack (July 1, 2006). In FY2007, the state collected $52 million less revenue than projected and over $22 million less than the previous fiscal year. The trend continued with revenue sinking to $763 million in FY2008 and $727 million in FY2009.
    
  
  
  • In 2009, Washington D.C. raised cigarette excise taxes from $2.00 to $2.50 a pack. According to the city’s Chief Financial Officer, DC will collect $15.4 million less revenue than projected and $7.6 million less than the previous year. (Washington City Paper, February 2010)
    
  
  
  • Maryland raised cigarette taxes in 2007 and 2008 by 100 percent yet revenue increased by only 50 percent. In other words, the state collected about half the revenue expected from the tax increases. (Washington Policy Center, 2010)
  
  
• 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 $24 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
  According to the Bureau of Alcohol, Tobacco and Firearms (ATF) tobacco smuggling (diversion) is a global problem and illegal cigarettes are the number one black market commodity in the world.
  
  An increase in tobacco taxes will escalate this 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.
  
  According to the Mackinac Center for Public Policy’s study (“Cigarette Taxes and Smuggling: A Statistical Analysis and Historical View,” 2008), there is a direct link between cigarette excise taxes and the import smuggling rate (casual and organized). This is due to a state’s high tax rate relative to surrounding states, and other considerations like international borders and availability of counterfeit cigarettes. The top five states for consumption of smuggled cigarettes are:
  
  

  State	Smuggled Cigs as % of Consumption (1990-2006)	Tax/ Other factors
  CA	24.4 %	$.87/pack – Large counterfeit influx from China
  NY	20.9	$2.75/pack – NYC $1.50 Proximity to Tax-Free Indian Reservations
  AZ	20.6	$2.00/pack – surrounded by lower-tax states
  WA	20.1	$2.025/pack – surrounded by lower-tax states
  MI	16.0	$2.00 – surrounded by lower-tax states

  
  
  The World Health Organization’s Framework Convention on Tobacco Control estimates that worldwide tax loses to governments to be between $40 billion and $50 billion per year. In the U.S. alone, $5 billion a year in tax revenue is lost to state and federal governments due to smuggling.
  
  
• Cigarette sales are an unreliable source of income
  Cigarette sales traditionally decline from two to four percent annually but have declined by almost 9 percent in 2009 due to the massive federal excise tax increase that 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
  Tobacco taxes impact working families the most. One in four (26%) of smokers fall below the poverty line. A majority (55%) of smokers are classified as “working poor.”
  
  Increases in cigarette taxes particularly burden the poor. Expenditures for cigarettes [including taxes] amount to 3.2 percent of the income of people in the bottom fourth of the income distribution, but only .04 percent of income of people in the top fourth.
  
  Smokers make significantly less money than non-smokers. In fact:
  • 99% of smokers make less than $250k
  • 94% of smokers make less than $200k
  • 88% of smokers make less than $100k
  • 80% of smokers make less than $75k
  
  
  
• 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.