Policy Documents

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

September 11, 2009

Smokers have become a favorite target of many legislators across the country. Some policymakers seem to think taxing smokers is a win-win way to curb smoking and raise revenue, without hurting the economy. In practice, however, these taxes create more budget problems than they solve. As the tobacco tax revenue stream falls short of expectations, which it invariably does, budget deficits grow ... and many of these tax supporters begin singing a different tune.

It's interesting, for example, that smoking cessation programs--a "public health" justification often linked to tobacco tax hikes--are in many cases being de-funded. When that happens, the tobacco tax itself is left in place, its revenues diverted to general funds in order to help shore up a budget shortfall or pay for entirely unrelated programs.

The hypocrisy surrounding tobacco taxes doesn't end there. Moreover, they are not the boon many people believe them to be, for the following 10 reasons.

1. They are regressive and disproportionately burden lower- and middle-income people. Not only are lower-income earners more likely to smoke, they also smoke more frequently. They bear more of the tax burden than higher-income earners, in absolute terms and as a percentage of income.

2. They are an unreliable and unsustainable source of revenue and don't structurally fix budget deficits. Many states rely on these revenues to balance their budgets, year in and year out. More than 20 states are considering tax hikes to fill current budget holes. But tobacco tax hikes don't address what's causing the holes in the first place.

3. They are a discriminatory tax on a minority of the population. The smoking public represents only about 18 percent of the population, and there has been a general decline in smoking for decades. Tobacco taxes are part of the "divide and conquer" approach implemented by big-spending legislators who find it easier to tax small groups of the population one at a time to avoid widespread constituency backlash.

4. They hurt local businesses and the overall economy. Hav-A-Tampa cigar closed its factory in Florida and laid off about 495 employees this summer due to the federal excise tax hike on tobacco products signed earlier this year by President Barack Obama. Many people travel outside the state to buy their tobacco products, and they are likely to make other purchases out of state as well, thereby hurting local businesses.

5. They encourage cross-border, black market, and Internet purchases. As tobacco taxes have risen, so has tax evasion. The Mackinac Center reports tax-induced smuggling has become so widespread that it "undermines both the revenue and health goals of higher cigarette taxes, while producing unintended consequences for individual states and American society as a whole."

6. They help keep government spending up. As policymakers adopt new and expanded programs that rely on tobacco tax revenues, other taxes will inevitably go up when the tobacco tax revenues fall short of the programs' funding needs.

7. They kick the real fiscal problems down the road and distract from meaningful spending reforms. Instead of raising taxes on tobacco or anything else, policymakers should consider enacting sensible tax and expenditure limits, reforming the state workforce, and performance auditing. Budget deficits are not a revenue problem, but a spending problem.

8. Smokers are not the only ones harmed by tobacco taxes, which do not prevent further tax hikes. A National Taxpayers Union study found, "Taxpayers face a seven out of 10 chance of seeing another net annual tax hike within two years of a tobacco tax hike." There is a strong correlation between states that have high tobacco taxes and those that have high overall tax burdens.

9. Tobacco taxes are already high, and states are beginning to experience diminishing returns. According to the Center for Policy Research of New Jersey, the Garden State experienced a net loss of nearly $24 million in tobacco tax revenue during the two years following a 17.5 cent tax increase.

10. Projections for tobacco tax revenues are frequently over-estimated. Only 16 of the 57 tobacco tax hikes implemented between 2003 and 2007 met or surpassed the projected revenue.

 

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

More information on each of these points is available at the links below.

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1. 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.

2. Tax Hikes Often Fail to Generate Expected Revenues
http://www.heartland.org/Article/22891
Economists warn tobacco taxes are an unpredictable source of revenue.

3. The Sin Tax: Economic and Moral Considerations
http://www.acton.org/publications/occasionalpapers/publicat_occasionalpapers_sintax.php
Robert Sirico, president of the Acton Institute, examines how the economic and moral considerations of "sin taxes" intersect and are not mutually exclusive. He warns, "we ought to consider fundamental issues regarding the interplay between private morality and public policy."

4. Hav-A-Tampa Closes its Factory ...
http://www.tampabay.com/news/business/article1012864.ece
The Tampa Tribune reports that due to excessive government regulations and taxes, nearly 500 jobs were lost in Florida when the Hav-A-Tampa Cigar factory closed in 2009.

5. Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review
http://www.mackinac.org/article.aspx?ID=10005
The Mackinac Center for Public Policy takes a state-by-state look at tax-induced cigarette smuggling.

6. 22 Million New Smokers Needed: Funding SCHIP Expansion with a Tobacco Tax
http://www.heritage.org/research/healthcare/wm1548.cfm
The Heritage Foundation outlines many of the problems associated with using cigarette taxes for programs such as SCHIP. The study finds 22 million new smokers would be needed by 2017 to keep SCHIP solvent.

7. Taxing Tobacco: Spending Obligation, not Cigarettes, Is the Real Threat
http://www.goupstate.com/article/20090405/NEWS/904039924?Title=Taxing-tobacco-Spending-obligation-not-cigarettes-is-the-real-threat
Joshua Culling of the Tax Foundation describes how tobacco taxes make spending worse and don't do anything to fix the actual budget problems of a state.

8. Debunking the "Tax Thee, But Not Me" Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes
http://www.ntu.org/main/press_issuebriefs.php?PressID=1001&org_name=NTU
According to the National Taxpayers Union, "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."

9. Stupid Tax Policy
http://blog.nj.com/njv_gregg_edwards/2009/05/stupid_tax_policy.html
Gregg M. Edwards, president of the Center for Policy Research of New Jersey, reports how his organization found New Jersey brought in less revenue after its cigarette tax hike than was coming in before the hike was implemented.

10. Lawmakers Who Opposed Tobacco Tax Cite Funding Source Concerns
http://www.swtimes.com/articles/2009/05/03/news/news050309_10.txt
Just months after Arkansas' tobacco tax hike to establish a statewide trauma system, the revenue estimates already had to be updated. The new projected revenues were $15 million less than what was originally estimated.

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For further information on the subject, visit the Budget & Tax 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, contact Legislative Specialist John Nothdurft at 312/3774000 or jnothdurft@heartland.org.