Policy Documents

Virginia Needs Spending Reform, Not Higher Cigarette Taxes

December 18, 2008

For years tobacco consumers have been flocking to Virginia to take advantage of the 30 cents-per-pack cigarette tax in order to avoid taxes in Maryland and Washington, DC, where the tax is currently $2.00 per pack. This week Gov. Tim Kaine proposed doubling Virginia’s cigarette tax to 60 cents per pack in an attempt to fill the state’s budget deficit.

Such a move would weaken Virginia’s tax advantage over its neighbors to the north and drive consumers and revenue elsewhere. Other states have tried—and failed—to “solve” their budget deficits with cigarette tax increases.

Hiking cigarette taxes while ignoring much-needed spending reforms is bad fiscal policy.

Cigarette tax increases discriminate against a minority of the population.
In 2007, smokers contributed $280 million to Virginia in cigarette excise and sales taxes. With a smoking rate hovering just under 20 percent, it is no wonder that raising cigarette taxes is so popular. The “tax thee, but not me” approach makes hiking cigarette and other “sin” taxes appealing to politicians wanting to raise revenue without angering most taxpayers. This places an undue burden on a minority of people who can least afford it and who already pay more than their “fair share.”

Cigarette taxes are a notoriously volatile source of revenue.
The general decline in tobacco use and increasing popularity of tax-avoidance measures—Internet, Indian reservation, or cross-border purchases, plus outright smuggling—make cigarette taxes a highly volatile source of revenue. Cigarette tax increases invariably produce less revenue than projected. As a result, smokers and non-smokers alike are often called upon to make up the revenue shortfall as legislators scurry around in search of additional revenue. A recent 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.”

Cigarette taxes are highly regressive and place an undue burden on the poor.
Studies have shown tobacco use is more common among low-income Americans than among those with higher incomes. Cigarette taxes take a bigger share of the income of a low-income person than a high-income person, and the low-income person also pays more cigarette taxes in absolute terms. Dr. Dahlia Remler, a professor with the Department of Health Policy and Management at Columbia University, noted in a 2004 study, “With such politically painless taxes available, the issue of regressivity has received only limited attention.” She later adds, “In the drive for better public health, we should acknowledge the price paid. Standard principles for assessing the equity of taxes should not be forgotten.”

A fiscally responsible alternative is available: Spending reform.
Implementing fiscally responsible spending policies, instead of raising taxes, will go a long way toward stabilizing future budgets. Virginia lawmakers should focus on capping taxes and expenditures at a sensible level. They also should allow market-driven solutions to take the place of costly government programs and services. In the end, if the legislature is unwilling to tackle the budget problems with fiscal restraint instead of knee-jerk tax increases, then budget deficits will continue to occur and an unnecessary strain will be placed on Kentucky businesses and residents.

The following articles offer additional information on cigarette tax hikes.

 

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.”

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

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

Six Reasons Not to Raise Tobacco Taxes
http://www.heartland.org/Article.html?articleId=13816
Economist Dr. William Anderson of the Oklahoma Council of Public Affairs outlines six pitfalls of higher cigarette taxes.

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.

Cigarette Taxes Are Fueling Organized Crime
http://online.wsj.com/article/SB121012081570272357.html?mod=opinion_main_commentaries
Patrick Fleenor, chief economist for the Tax Foundation, shows high cigarette taxes have fueled organized crime and a profitable black market in New York.

Cigarette Tax Burnout
http://online.wsj.com/public/article_print/SB121841215866128319.html
Last year Maryland increased its cigarette tax to $2 a pack in order to fund health care ... but now the state’s budget is facing a billion-dollar shortfall. This article outlines the budget mess that always results when states rely on cigarette tax revenues even as smoking rates decline.

 

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.