New Jersey Cigarette Tax Hike Reduces Revenues Again

Published December 1, 2008

For the second consecutive year, New Jersey has unintentionally shattered the conventional wisdom on cigarette tax increases, that higher taxes serve the dual and seemingly opposite purposes of reducing and exploiting cigarette consumption.

Higher taxes and cigarette prices prompt some smokers to quit. But most smokers, so the wisdom goes, accommodate higher prices. The total number of smokers shrinks while government reaps higher tax revenues from the remaining smokers.

New Jersey’s experience, however, proves this dynamic has its limits. Last year New Jersey became the first state to see an actual reduction in cigarette tax revenues in the same year the tax rate increased.

In fiscal year 2007, the year the tax rate was increased, the cigarette tax raised $22 million less than the previous year. Conventional wisdom was proven wrong: A tax increase doesn’t result inevitably in a revenue gain.

Revenues Down Again

Conventional wisdom also holds that while total cigarette sales might fall in the first year of a tax hike, they will stabilize or rebound in the succeeding year. That assumption has been proven wrong, too. In the second year following New Jersey’s most recent tax hike, total sales continued to decline, as did tax revenues. So, as a result of a tax increase, New Jersey actually lost almost $24 million in revenues.

The anti-smoking hysteria that infects many high-tax advocates blinded them to economic realities. They believed only a small portion of smokers were price-sensitive. In fact, many smokers are price-sensitive. Some quit, but more opt to shop in cheaper venues.

Bricks-and-mortar New Jersey cigarette sellers are losing purchasers to stores in other states, the Internet, and even the black market. Since these venues don’t collect New Jersey taxes (or any taxes at all in some cases), the state is losing revenues.

Four Hikes in Seven Years

Most New Jersey policymakers also were seduced by anti-smoking ideology. Consequently, they refused to acknowledge the precipitous drop in sales that coincided with four tax hikes in seven years. During that period, the national demand for cigarettes dropped by about 18 percent. In New Jersey, demand decreased by a whopping 47 percent.

New Jersey wasn’t losing smokers; it was bleeding cigarette purchases.

By 2006 it was clear cigarette sales had reached a tipping point. Another tax increase, even a modest one, likely would cause sales to drop to the point that they would negate the value of the tax increase. When lawmakers enacted New Jersey’s most recent tax increase, they dismissed the possibility that it would trigger a revenue decline. Taxing smokers was too tempting and too easy to be derailed by the counterintuitive threat of reduced revenues.

Anti-smoking zealots stubbornly cling to conventional wisdom regardless of the evidence. For example, the Campaign for Tobacco-Free Kids suggested New Jersey lost revenue because its last tax increase was too small.

Black Market Buyers

It’s outrageous that an organization dedicated to discouraging smoking among minors promotes a tax policy that makes cigarettes more accessible to teenagers. The cigarette black market, which is a byproduct of New Jersey’s high tax, caters to minors searching for cheaper cigarettes and sellers who don’t ask to see proof of age.

The anti-smoking lobby may be well-meaning, but its tax agenda is counterproductive. Its advocacy of a high cigarette tax is exporting New Jersey tax revenues to other states.

High taxes also are undermining anti-smoking efforts and jeopardizing the welfare of New Jersey residents. The cigarette black market not only makes it easier for teenagers to buy cigarettes, it provides a relatively easy source of income for organized crime and urban gangs.

Legitimate Markets

These problems could be reduced or eliminated by lowering the cigarette tax. Smokers would resume buying cigarettes from legitimate New Jersey retailers. Tax revenues certainly would increase. Less-expensive cigarettes also would undermine the black market.

Unwilling to acknowledge the failure of its high-tax policy, the anti-smoking lobby probably would claim a tax reduction would encourage smoking. But the tide against smoking is powerful. An economically realistic tax would not recruit new smokers. If the anti-smoking lobby believes otherwise, then it lacks faith in its message.

Gregg M. Edwards ([email protected]) is president of the Center for Policy Research of New Jersey. This article originally appeared in the October 12 edition of the Asbury Park Press. Reprinted with permission.