States Look to Cigarettes for Revenue

States Look to Cigarettes for Revenue

Nine states increased taxes on cigarettes last year, and a dozen more are weighing hikes in 2016.

That's old news, in a sense. Cigarette and other "sin" taxes have long been favored by lawmakers looking to make an easy buck by targeting the latest social outcast. And there is no easier target these days than smokers. They partake of an unpopular product, threaten the health of themselves and those around them, and make our clothes smell bad if we stand next to them.

Smoke-shaming is practically a national pastime. So, lawmakers reason, why not make them pay?

One proposal in Missouri would raise cigarette taxes from 17 cents per pack to 67 cents per pack, yielding an estimated $250 million to be spent on early childhood education programs. A different plan in the Show-Me State would hike the rate to 40 cents per pack and spend the $100 million on road and bridge repairs.

Indiana lawmakers, meanwhile, are considering an increase of $1 a pack to pay for roads. West Virginia might go from 55 cents to $1 a pack to cover a shortfall in the state employees' health-insurance program. Louisiana, Nebraska, and Wyoming are also considering increases of various sizes, with plans to use the money to cover budget shortfalls, property tax offsets, and public-health programs.

The idea of taxing cigarettes to fund popular or struggling programs is attractive, but the fact is that state tax revenue is fungible. Money earmarked for a specific project tends to simply replace general revenue, which is then shifted to some other project. In reality, the money all goes into the same government pot. There's no such thing as a cigarette-tax lockbox.

Also, it's not clear why smokers should be taxed twice to build the same road for which the rest of us are taxed only once (via gasoline taxes). And of course, smokers tend to have lower incomes than the general population, making cigarette taxes among the most regressive.

As bad as the iniquity is the unreliability. Cigarette-tax revenues are designed to decline, in part because governments spend money to persuade people not to smoke and thus not pay taxes on cigarettes. In this way, states discourage the very revenue they hope to raise.

When Philadelphia enacted a cigarette tax increase in 2014 to boost school spending, the city's own estimates predicted it would bring in $83 million the first year, then decline steadily to $72.7 million by 2019. That's a bad way to fund education, where costs are almost always increasing.

One thing that complicates the debate from a national perspective is the wide range in state cigarette taxes. Missouri, at the low end of the scale, charges 17 cents per pack, while New York's per-pack tax of $4.35 is the nation's highest. All packs of cigarettes are also subject to a $1.01 federal tax.

In states at the lower end, lawmakers in favor of higher cigarette taxes often point to the national average — or neighboring states with higher taxes — as evidence that their state, too, should charge more for a pack of smokes. It's rare to hear that same argument at the other end, even though the Tax Foundation estimates that more than half of all cigarettes consumed in New York are smuggled into the state — meaning the state government has created a black market through exuberant taxation.

Every state budget is filled with pointless programs that could be eliminated to free up money to fund the projects for which states are contemplating raising cigarette taxes. That would be the wiser course.

But if states are going to increase their reliance on regressive sin taxes, the least they could do is stop shooting their own revenue in the foot by nagging people about their vices. That would serve multiple purposes: States would get more revenue from the tax, states could save money by not funding anti-smoking campaigns, and everybody would be a little bit happier about not being harangued over their personal habits.

John Bicknell is executive editor of Eric Boehm covers regulatory issues for Watchdog.

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