States Are Smart to Cut Cigarette Taxes

States Are Smart to Cut Cigarette Taxes
April 6, 2011

John Nothdurft

John Nothdurft (jnothdurft@heartland.org) joined the staff of The Heartland Institute in May 2008... (read full bio)

After decades of increasing tobacco taxes at the federal, state, and local levels, some states are beginning to buck this fiscally burdensome and irresponsible trend.

On March 17, the New Hampshire House of Representatives passed a bill that would cut the state’s cigarette tax by a dime, to $1.68 per pack. Two other states with high tobacco taxes—New Jersey and Rhode Island—are also considering proposals to reduce taxes on tobacco products to make their state’s tax rates more competitive.

This reversal in policy would be fiscally responsible and especially beneficial to low-income people.

Many economists have noted that many states’ cigarette taxes are so high that further tax increases will bring in less revenue than expected and may actually cause the states to lose revenue. After New Jersey raised its cigarette tax 17.5 cents, it experienced a net loss of $24 million in revenue over the next two years.

New Jersey’s revenue drop and results from other states show cigarette tax hikes do not fix budget “potholes” and instead create more long-term budget problems. Lower-income taxpayers are unduly affected by this regressive tax, and de facto “prohibition environments” have been created in some of the higher-tax areas, causing crimes such as smuggling.

Despite these problems, some states with relatively low tobacco taxes, such as California, Georgia, and Idaho, are considering sacrificing their competitive advantage by raising these taxes. These tax hikes would probably increase revenue somewhat in the short term, but the revenues will likely be less than expected, and the revenue stream will dry up over time. That is why some states are thinking about reducing their tax rates.

As smoking rates continue to fall and more people purchase their smokes from less-taxed venues, a new shortfall in revenue is left for other taxpayers to pick up. These revenue gaps will likely leave taxpayers back on the hook for higher taxes to cover the excess spending that was propped up by tobacco taxes in the first place. According to a study by the National Taxpayers Union, “41 of 59 state tobacco tax increases between fiscal years 2001 and 2006 were followed by tax hikes in the two-year period following enactment.”

Instead of drawing a line on spending, far too many politicians have turned to “sin” taxes on tobacco, soda, alcohol, and other targeted products to duct-tape their budgets. Even so-called fiscal conservatives often support regressive tax hikes on “sins” to fill budget holes, instead of tackling spending.

In many cases these taxes don’t even have a significant impact on the social or health problem their proponents claim they’ll help fix. Anti-smoking advocates often argue these taxes reduce the number of smokers, and to some extent that’s true, but most smokers merely avoid the tax, thereby hurting local businesses. The taxes just encourage people to buy tobacco products in the black market, online, or across state lines.

States should be looking to create competitive tax advantages and preserve any advantages they already enjoy. It would be smart of New Hampshire, Rhode Island, and New Jersey to buck the trend and begin lowering their tobacco taxes. And California, Georgia, and Idaho would do well not to give up their tax advantage.

John Nothdurft (jnothdurft@heartland.org) is director of government relations for The Heartland Institute.

John Nothdurft

John Nothdurft (jnothdurft@heartland.org) joined the staff of The Heartland Institute in May 2008... (read full bio)