Cigarette Tax Hike Would Hinder Reform

Published January 9, 2009

Raising any taxes in these tough economic times, even on cigarettes, is economically dangerous, but Gov. Beshear has already shown he views a cigarette tax hike as a “silver bullet” for the state’s budget woes. Although he thinks cigarette taxes affect only smokers, they actually harm all taxpayers and hinder the adoption of much-needed spending reforms.

The proposed cigarette tax hike would uniquely jeopardize the broadened tax base the state has enjoyed for years by having a significantly lower cigarette tax rate compared to neighboring states such as Ohio. Consumers are shopping in Kentucky, where the cigarette tax is 30 cents per pack, in order to avoid Ohio’s $1.25 per pack tax.

A recent report from the Mackinac Center found, “In 2006 for every 100 cigarettes smoked in Kentucky an additional 7.23 cigarettes were smuggled out of the state [by residents of other states buying them in Kentucky.” One hundred percent of those smuggled cigarettes were the result of casual (not commercial) smuggling. In other words, people who live on the border of Ohio, or perhaps some other state, are crossing the border to buy their smokes.” Hiking the tax would eliminate Kentucky’s tax advantage and drive consumers and revenue out of state.

Hiking the cigarette tax to “solve” the state’s budget problem has three fundamental flaws. Cigarette taxes discriminate against a minority of the population; they are a notoriously unreliable source of revenue; and they are highly regressive. All of this makes hiking cigarette taxes very bad fiscal policy.

The biggest reason politicians gravitate toward cigarette tax hikes is that they’re borne directly by only a quarter of the population. Anti-smoking advocates have successfully produced a political environment that is irrationally biased against those who partake in the legal act of smoking.

But those who argue for high cigarette taxes should note smokers in Kentucky already pay more than their “fair share,” doling out $298 million in excise and sales taxes in 2007. Hiking the tax rate may end up bringing in less money, as tax hikes encourage both a general decline in tobacco use and the expansion of various forms of tax-driven smuggling. The experience of other states shows that cigarette tax hikes usually result in lower-than-projected revenue, and other taxes are raised in order to fill the gap. Cigarette tax hikes end up hurting everybody, not just smokers.

Finally, cigarette taxes are inherently regressive. Dr. Dahlia Remler of the Department of Health Policy and Management at Columbia University acknowledged this in a 2004 study: “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.”

Instead of turning to politically “safe” tax hikes to try to shore up the budget, the state should look at a long-term budget fix such as implementing a sensible spending cap. A cap would foster more efficient expenditure decisions and hold government more accountable.

If the governor doesn’t support a real fix for the state’s budget, one based on fiscal restraint instead of more tax increases, all Kentucky businesses and residents will feel the strain.

John Nothdurft ([email protected]) is the budget and tax legislative specialist for The Heartland Institute.

This op-ed was originally published in the Port Clinton News Herald .