Policy Documents

Research & Commentary: April Fool’s Day Tobacco Tax Hike—The Joke’s On States

April 1, 2009

A 62-cent increase in the federal excise tax on tobacco products, intended to fund the expansion of the State Children’s Health Insurance Program (SCHIP), goes into effect April 1.

The joke will be on state budgets—and ultimately taxpayers—because tobacco taxes are not the revenue boon advocates claim them to be.

In 2007, states collected $15.26 billion in tobacco tax revenue. Many states rely on those revenues to balance their budgets each year—more than 20 states are considering tax hikes to fill current budget holes.

Unfortunately, cigarette tax hikes are at best a short-term fix. This is especially true considering the narrow tax base of tobacco, the general decline in tobacco use, and the fact that high tax rates are already driving an increase in smuggling and untaxed purchases.

State tobacco tax revenues already have dried up over the years, and they will shrink even more as the federal tax increase goes into effect. Only 16 of the past 57 state tobacco tax hikes have met or exceeded their revenue estimates. According to the Center for Policy Research of New Jersey, the Garden State recently saw a net loss of nearly $24 million in revenue during the two years following a 17.5 cent tax increase.

Not only are tobacco taxes a notoriously volatile source of revenue, they also hurt small businesses and disproportionately burden low- and moderate-income earners. According to the Bureau of Labor Statistics, 95.8 percent of tobacco expenditures are made by consumer units (people spending together) who earn less than $150,000 a year.

It is no coincidence that studies show states with higher cigarette taxes also have higher overall tax burdens. As policymakers adopt new and expanded programs that depend on tobacco tax revenues, other tax burdens inevitably must go up when the tobacco tax revenues fall short of the programs’ funding needs.

Since tobacco taxes are an unstable and regressive source of revenue, states should avoid using them to compensate for their own bloated spending practices. The following articles offer additional information on tobacco tax hikes and their effect on state budgets.

 

The Cigarette Tax Increase to Finance SCHIP
http://assets.opencrs.com/rpts/RS22681_20070619.pdf
This Congressional Research Service study finds, “A 50 cent increase (in the federal cigarette tax), for example, would raise nearly $7 billion a year, but would cost state and local governments about $1 billion.” It goes on to outline how the tax increase would hurt lower-income families.

A State-by-State Estimate of the Impact of SCHIP Expansion and a 156 Percent Cigarette Tax Hike
http://www.taxfoundation.org/files/ff88.pdf
The Tax Foundation analyzes by state the impact of the federal cigarette tax hike and reports how much per household SCHIP would cost.

Virginia Needs Spending Reform, Not Higher Cigarette Taxes
http://www.heartland.org/full/24408/
This Research & Commentary, written in response to Virginia’s proposed cigarette tax, outlines three reasons states need to be wary of tobacco tax increases and how spending reforms are the real solution.

Heritage Foundation: Expanding SCHIP Will Challenge State Finances
http://www.foxnews.com/story/0,2933,293667,00.html
This article explains how an increase in the federal cigarette tax will hurt state finances. This is often an overlooked issue that is of particular importance to state legislators.

Private Judgments + Public Policy = Sin Taxes
http://www.heartland.org/publications/budget%20tax/article/19658/
Christopher Z. Mooney, professor of political studies at the University of Illinois-Springfield, has extensively studied how private moral judgments shape public policy. This interview with Mooney focuses on “sin” taxes.

Key Facts All Lawmakers Need to Know About Tobacco Tax Increases
http://www.atr.org/content/pdf/2005/dec/120805ot-memo-tobacco.pdf
Researchers with Americans for Tax Reform explain the shortfalls associated with cigarette taxes and dispel many of the myths attached to them.

Poor Smokers, Poor Quitters, and Cigarette Tax Regressivity
http://www.heartland.org/policybot/results/19564/
Dr. Dahlia Remler, with the Department of Health Policy and Management at Columbia University, rebuts the argument that cigarette taxes are not regressive.

Cigarette Tax Burns the Poor
http://www.beaconhill.org/Portal/PDFVerClips/HeraldOpEd080416CigTax.pdf
David Tuerck, professor of economics and executive director of the Beacon Hill Institute at Suffolk University, outlines how cigarette taxes unfairly burden low-income earners.

 

For further information on the subject, you can visit the Tobacco Issue Suite on The Heartland Institute’s Web site at www.heartland.org.

Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. If you have any questions about this issue or the Heartland Web site, you may contact Legislative Specialist John Nothdurft at 312/377-4000 or jnothdurft@heartland.org.