Lawmakers in Connecticut are considering a proposal to increase the state’s current cigarette tax by 22 percent, amounting to an additional $1 per pack in taxes. Gov. Dannel Malloy (D) has recommended a smaller 25-cents-per-pack tax.
These proposals come on the heels of a cigarette tax of 45 cents per pack that took effect in Connecticut on December 1, 2017. Currently, Connecticut and New York have the highest state cigarette excise taxes; both charge $4.35 per pack in taxes. If approved, the $1 tax increase would make Connecticut the highest taxed state for cigarettes; a pack of cigarettes would cost at least $1 more than all Connecticut’s neighboring states.
Whenever tobacco taxes are increased, residents buy cigarettes elsewhere, reducing revenues for the state, disproportionately burdening low- and moderate-income families, and leading states to rely on unstainable revenue sources.
Connecticut is no stranger to cigarette smuggling. According to the Tax Foundation, the state ranked 11th for “smuggled cigarettes consumed as percentage of total cigarettes consumed” in 2015. The Tax Foundation report found the rate of smuggled cigarettes in Connecticut increased by seven percentage points, or 125 percent, since 2006. Further, the Tax Foundation analysis concluded when the state’s excise tax on a pack of cigarettes was $3.40, more than a dollar less than it is now. The proposed legislation would likely cause the amount of smuggled cigarettes to increase significantly, and it could even lead to Connecticut becoming the state with the most smuggled cigarettes. (New York currently ranks first.)
In a recent commentary in the Hartford Courant, Michael LaFaive, senior director of fiscal policy at the Mackinac Center and Todd Nesbit assistant professor of economics at Ball State University examined Malloy’s “deficit mitigation” plan to increase the current tax by 25 cents per pack. The authors suggest, based on models examining the loss of revenue from other tax increases, the proposed legislation would create “a very small decline in revenue – 0.8 percent in the first year – as a direct result of tax evasion.” The dollar-per-pack tax increase proposal would generate an even steeper decline.
Making matters worse, increasing the cigarette tax will not produce the health effects legislators hope to accomplish. The Yankee Institute says the effectiveness of using taxes to influence people’s behavior is “in dispute.” Citing research by the National Bureau of Economic Research, Yankee Institute researchers conclude “tobacco taxes had ‘small and not usually statistically significant’ effects on tobacco usage.”
The legislation proposed by the General Assembly to increase the cigarette tax by one dollar would dedicate 50 percent of the revenue raised from the tax to “tobacco education, prevention and cessation programs.” The remaining funds would be allocated to the state’s general fund, yet current tobacco sales funds, especially those from the Master Settlement Agreement (MSA), have been used infrequently for funding tobacco cessation programs and education. The MSA was the “largest civil litigation settlement in U.S. history,” when 46 states settled with four cigarette manufactures to “recover Medicaid and other costs the states allegedly incurred in treating sick and dying cigarette smokers.”
The Yankee Institute found between 2000 and 2009, only $23 million of the $1.3 billion in tobacco settlement money had “been spent on anti-tobacco efforts including smoking education and prevention programs … and medical research.” The Yankee Institute highlights the Tobacco and Health Trust Fund in its analysis. The Tobacco and Health Trust Fund was created to “ensure [settlement] money would be put to intended use.” The fund accumulated $12 million annually, accumulating to “$134 million over its first nine years – about 10 percent of the total settlement revenue Connecticut [had] received.” In 2009, only $9.2 million had been approved for spending.
Legislators should also take note that tobacco tax increases are highly regressive. A Cato Journal article by Kevin Callison and Robert Kaestner concluded that from “2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000.”
Using tobacco tax increases to ease budget troubles disproportionately harms lower-income individuals and families and is only minimally effective at curbing consumption. The proposed tax hike will do nothing more than boost an already existing illegal market and create additional deficits that will need to be remedied by additional tax increases imposed in the future.
The following documents provide additional information on tobacco taxes and other “sin” taxes.
Three Reasons to Avoid Tobacco Taxes
Elizabeth Stelle of the Commonwealth Foundation examines Pennsylvania’s proposed tobacco tax hikes. Stelle argues they are the wrong prescription for the state, and she outlines several reasons why they are harmful.
Cigarette Taxes and Smoking
In this study from the Cato Institute, Kevin Callison and Robert Kaestnersuggestfuture cigarette-tax increases will offer relatively few public health benefits, and they say the justification given for future taxes should be based on the public finance aspects of cigarette taxes, such as the regressiveness, volatility, or the rate of revenue growth associated with those taxes.
Ten Principles of State Fiscal Policy
This Heartland Institute booklet provides policymakers and civic and business leaders a highly condensed yet easy-to-read guide to state fiscal policy matters. It presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low,” to “Protect state employees from politics.”
Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
Heartland Institute Government Relations Director John Nothdurft argues targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned about the public health effects of tobacco should encourage the use of readily available smoking cessation products and services instead of supporting bad tax policy.
Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
This Heartland Institute Policy Brief argues, “Tax increases above current levels are not justified by appealing to the costs smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”
Poor Smokers, Poor Quitters, and Cigarette Tax Regressivity
Dr. Dahlia Remler of the Department of Health Policy and Management at Columbia University demonstrates cigarette taxes are regressive, burdening poor individuals more than other groups.
Debunking the “Tax Thee, But Not Me” Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes
The nonpartisan National Taxpayers Union observes, “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.”
Cigarette Taxes and Smoking: Will Higher Taxes Yield a Public Benefit?
Kevin Callison and Robert Kaestner of the Cato Institute summarize their study focusing on the effect of recent, large cigarette-tax increases on the smoking behavior of adults ages 18–74. The data suggest the association between cigarette taxes and either smoking participation or number of cigarettes smoked is small, negative, and not usually statistically significant.
Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review
The authors of this study consider cigarette smuggling from two angles. First, they employ a statistical model to estimate the degree to which cigarette smuggling occurs in 47 of the 48 contiguous U.S. states. Second, they review the historical experiences of three states – California, Michigan, and New Jersey – known to have cigarette-smuggling problems. The findings suggest state policymakers should reassess the value of cigarette taxes as a revenue source and public health tool.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Charlie Katebi, Heartland’s state government relations manager, at [email protected] or 312/377-4000.