Policy Documents

Research & Commentary: Pennsylvania Tobacco Tax

June 30, 2013

The Philadelphia City Council is pushing the Pennsylvania legislature to allow it to impose a new $2 per pack tax on cigarettes to help pay for the Philadelphia School District’s $304 million budget deficit. The city council expects to raise around $45 million from the cigarette tax and included the revenue in its most recent budget. The proposal requires the Pennsylvania legislature to approve this new tax through enabling legislation.

The additional revenues this tax would generate would make it more likely the city will not address the school district’s structural budget problems. Increasing tobacco taxes has many negative effects, including driving residents to buy untaxed or lower-taxed tobacco elsewhere, reducing revenues for retailers, unduly burdening low- and moderate-income families, and propping up spending with an unsustainable source of revenue. In recent years these taxes have proven to be ineffective. In the past three years, 18 of the 21 states that increased cigarette tax rates collected less revenue than projected, and most fell short by millions of dollars.

Pennsylvania’s experience has been no different. During a revenue briefing in May, Matthew Knittel, executive director of Pennsylvania’s Independent Fiscal Office, testified the revenue from the state’s cigarette tax fell by about twice as much as the office expected. As of May 2013, the revenue from the 2013 fiscal year to date is already down by 4.6 percent from 2012. This drop exceeded all predictions, the IFO having expected only a 2 percent decrease.

The city council’s proposal is likely to drive consumers to purchase tobacco in other cities and counties while increasing black-market sales of tobacco products. The tax hikes would reduce overall sales for Philadelphia retailers and wholesalers as consumers avoid the tax by buying cigarettes outside the city and making other purchase at the same time. The National Association of Convenience Stores reports cigarette sales account for 38.2 percent of all in-store sales at convenience stores.

Cigarette taxes are highly regressive, unduly burdening moderate- and low-income individuals. The Bureau of Labor Statistics reports 95.8 percent of tobacco expenditures are by consumer units (people spending together) that earn less than $150,000 a year.

Tobacco taxes are a notoriously unreliable and shrinking source of revenue because the number of smokers is decreasing. Allowing localities to impose ineffective excise taxes will only encourage new spending that the new tax cannot cover. The state legislature should force the city council to address its spending problems instead of helping to further burden Philadelphians with a regressive tax increase.

The following documents examine tobacco and other “sin” taxes from multiple perspectives.

Ten Principles of State Fiscal Policy

This Heartland Institute booklet provides policymakers and civic and business leaders with a highly condensed yet easy-to-read guide to state fiscal policy matters. It presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low,” to “Protect state employees from politics.”

Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes

John Nothdurft of The Heartland Institute argues targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned about the public health effects of tobacco should encourage the use of readily available smoking cessation products and services, instead of supporting bad tax policy.

Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
John Nothdurft identifies some of the most and least effective and economically advisable ways states use to trim their budget deficits.

Sin Taxes: Size, Growth, and Creation of the Sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, taxing selected goods for general budget revenue contradicts the standard Pigouvian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries. 

Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
Policy analyst Eli Lehrer argues, “Tax increases above current levels are not justified by appealing to the costs that smokers impose on nonsmokers. Smokers already pay more than this measure could justify.” 

Debunking the “Tax Thee, But Not Me” Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes
The National Taxpayers Union observes, “The per-capita state and local tax burden in high-tobacco tax states is 8 percent above the national average, while the general tax bill for residents of low-tobacco tax states is 15 percent below the national average.”

Cigarette Taxes, Black Markets, and Crime: Lessons from New York’s 50-Year Losing Battle
Writing for the Cato Institute, Patrick Fleenor examines New York’s half-century battle with cigarette black markets and related crime. The study documents consumer responses to tax increases and discusses law enforcement and policy efforts to curb the negative effects of high cigarette levies. Finally, he discusses national and international experiences with cigarette taxes and finds New York’s problems are typical of jurisdictions levying high cigarette taxes.

Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review
 The authors of this study consider cigarette smuggling from two angles. First, they employ a statistical model to estimate how much cigarette smuggling occurs in 47 of the 48 contiguous U.S. states. Second, they review the historical experiences of three states—Michigan, New Jersey, and California—known to have smuggling problems. The findings suggest state policymakers should reassess the use of cigarette taxes as a revenue and public health tool.

Taxing Sin
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation,” they write.

Cigarette Taxes and Cigarette Smuggling by State
The Tax Foundation outlines the cigarette smuggling data for each state, comparing 2011 and 2006 smuggling rates and tax changes.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.