General Taxes Out, 'Sin' Taxes Are In
With state coffers flush with cash, general tax increases have been off the table in most states. However, proponents of higher taxes are being aided by special interest groups that want new or higher excise taxes on "morally ambiguous" products such as alcoholic beverages, cigarettes, and other tobacco products.
The list of states eyeing tax increases on cigarettes and other tobacco products, and on beer, wine, distilled spirits, or combinations thereof, has grown long.
In light of mounting evidence that higher alcohol taxes are not effective in reducing underage drinking or driving while intoxicated (see "Higher Alcohol Taxes Unlikely in 2006," Budget & Tax News, October 2005), alcohol tax increases seem to be a tougher sell than higher cigarette taxes, particularly in times of fiscal plenty. Thus, while most alcohol tax increase proposals quickly ran dry earlier this year, cigarette tax increases ranked high on the agenda in many states and passed in several.
Higher Health Spending Promised
Several of the cigarette tax hike proposals were tied to measures expanding health care spending. That swayed enough legislators to secure passage in Vermont (an increase of 60 cents per pack) and Hawaii (20 cents per pack for each of the next six years).
National taxpayer advocate Grover Norquist thinks these proposals are especially dangerous.
"Trying to expand a state's Medicaid program through raising the cigarette tax is a doubly harmful idea," Norquist said, "because it would not only have negative economic implications from the tax hike component, it also would feed an already monstrous and broken Medicaid system."
Revenues will not always go to the programs they are supposed to fund. Hawaii's tax hike, for example, was passed against the background of a $600 million budget surplus and promises from sponsor Sen. Roz Baker (D-Maui) that the increased revenue would help fund a cancer research center. But only one cent per pack of the revenue generated by the tax hike will be directed to the center, with the majority of the new revenue flowing into the state's general fund.
Texas and New Jersey also passed cigarette tax increases. Texas did so as part of an overall revenue-neutral tax shift, while New Jersey's cigarette tax increase was part of an overall tax increase on Garden State taxpayers.
Some States Defeat Hikes
In other states tobacco tax increases were defeated.
South Carolina legislators defeated several cigarette tax increase measures, one of which also sought to expand the state's Medicaid program. Pro-taxpayer legislators rejected all of them.
The Wyoming legislature also considered a significant tobacco tax increase this year, but the effort was defeated. The state has a $1.8 billion surplus.
Iowa Speaker Blocks Hike
Iowa Gov. Tom Vilsack (D) renewed his call to raise the cigarette tax by 80 cents per pack and added a proposal to raise the tax on beer. Realizing House Speaker Christopher Rants (R-Sioux City) would not allow a vote, Vilsack tried to change tactics halfway through the legislative session by saying he was open to using cigarette tax increase revenue to offset the "cost" of a tax cut passed by the House of Representatives. House Republicans responded by saying no offset was needed to pay for the tax cut. Rants' leadership spared taxpayers from a tax increase this year.
Rants said he believes the numbers prove him right.
"Even though tough choices remain, the bottom line is that Iowa's economy is growing at a rapid rate and the legislature was right to demand additional tax relief while at the same time refusing to go along with the governor's tax increases and requests for massive supplemental appropriations," Rants wrote on his blog at http://www.rants.us.
In Indiana, Gov. Mitch Daniels (R) earlier this year surprised many people by calling for a 25 cents per pack cigarette tax increase, but he quickly withdrew his proposal when it became clear there was much opposition to his plan. In late July Daniels once again took many by surprise when he renewed the call for higher cigarette taxes.
Referenda Push Hikes
Special interest groups and health activists have been eyeing the November ballots to push tobacco tax increases. Measures to hike tobacco taxes are on ballots in Arizona, California, Missouri, and South Dakota. The largest hike by far would be in California, where the proposal is to raise the cigarette tax by $2.60 a pack.
Paul Gessing, former director of government affairs at the National Taxpayers Union and now president of the Rio Grande Foundation, a state-based think tank in New Mexico, explained one reason for the current popularity of excise tax increases.
"Such narrowly targeted taxes have become increasingly popular in recent years because legislators can raise significant revenue without raising taxes on a majority of their constituents, most of whom do not smoke or rarely drink," Gessing said. "There is no question that states plan to continue raising taxes on alcohol and tobacco products, but as tax levels reach a tipping point and revenue growth is reduced, states will look for new ways to levy excise taxes on smaller groups."
Spending Restraint Needed
Jason Mercier, budget analyst at the Evergreen Freedom Foundation in Washington, said, "Legislators need to get out of the social engineering business and instead enact a uniform tax policy that treats all citizens equally. Cherry picking 'sin' taxes and other revenue-raising schemes deemed to be politically safe ignores the most important equation in budget sustainability: Spending restraint and prioritization.
"There will never be enough revenue to satisfy the spending demands of special interests," Mercier said. "Targeting one class of citizens to pay for the programs of another is not only shortsighted budget policy, it's morally wrong."
Sandra Fabry (email@example.com) is state government affairs manager for Americans for Tax Reform.