Congress voted in late September to reauthorize and expand the State Children’s Health Insurance Program (SCHIP), with $35 billion in new funding to come from an increase in the federal excise tax on tobacco. President George W. Bush, who supports a smaller SCHIP expansion, vetoed the bill on October 3 and Democrats, who control the House and Senate, began organizing to override the veto.
Proponents of the tax hike say it’s time for a federal tobacco tax increase, since the rate has not risen in a decade.
Rates Zoom, Revenues Plod
However, considering only the federal tax rate ignores the real tax burden on tobacco. States have steadily raised taxes on cigarettes and other tobacco products in recent years even while budget surpluses made other tax cuts politically popular.
According to an analysis by the American Shareholders Association, over the past seven years the average state cigarette tax rate has more than doubled, from 42 cents to 92 cents per pack.
According to the National Association of State Budget Officers (NASBO), 12 states are proposing higher tobacco tax rates for fiscal year 2008, for an expected net tax increase of $1.22 billion.
The doubling of average state tobacco tax rates is responsible for a spike in state and local tobacco tax collections. While the average tax rate has doubled, tax collections have increased by 59 percent.
States that have raised their tobacco taxes in recent years are facing diminishing revenue streams as consumers cross state borders or purchase products online or on Indian reservations. Increased smuggling and black market activity also account for some of the revenue decline.
Michigan Sales Plunge
In Michigan, for example, taxable cigarette sales have dropped by more than 25 percent since 2001. According to Michigan treasury spokesman Caleb Buhs, quoted recently in The Daily Oakland Press, “every time the price has been raised, the amount of packs of cigarettes [sold] has gone down.”
An increase in the federal excise tax on tobacco would slow state tobacco revenue growth further and magnify the negative impact on small businesses, which often lean on tobacco sales to stay in business.
Elizabeth Karasmeighan ([email protected]) is national policy analyst at Americans for Tax Reform.