Tax Hikes Often Fail to Generate Expected Revenues

Tax Hikes Often Fail to Generate Expected Revenues
April 1, 2008

State lawmakers are increasingly turning to tobacco taxes to balance state budgets and, they say, fund public health programs. The federal government followed suit in 2007, approving a $35 billion increase in the State Children's Health Insurance Plan to be funded by a hike in the federal tax on tobacco.

But many economists point out higher taxes and smoking bans reduce consumption, making tobacco revenue an unreliable funding source.

A 2007 study by the American Shareholders Association found the average state cigarette tax rate has more than doubled in the past seven years, from 42 cents to 92 cents a pack. Tobacco tax collections increased only 59 percent over that period. Reduced tobacco consumption, cigarette smuggling, and counterfeiting of cigarette tax stamps have regularly resulted in tobacco tax revenues failing to meet projections.

In fiscal year 2007, following a 17.5 cents per pack increase in the cigarette tax, New Jersey saw its tobacco tax revenue decline $23 million from the year before.

-- Nick Baker