There’s some big and troubling news out of Philadelphia, but it doesn't have anything to do with the Eagles’ pro-bowl quarterback Donovan McNabb going to the Redskins. Rather, it’s the news that the City Council, facing a $150 million budget deficit, may impose $6 million in new taxes on cigars, chewing tobacco, and similar products to close the budget gap.
The Philadelphia Daily news reports that Councilman Daryl Clark proposes taxing cigars at a rate of 3.6 cents per ounce, and taxing chewing and pipe tobacco at 36 cents per ounce. While an ounce may sound small, it’s important to know that an ounce of chewing tobacco is roughly the size of one container of the product. Word is that Clark proposed these new taxes after the City’s original plan for closing the budget gap – taxing sugary drinks and raising the trash collection fee – met stiff resistance. In the face of opposition to taxing soda and garbage, the Council has set its sights on an easier target, tobacco, rather than reform its spendthrift ways.
There are some serious problems with this new tax. Clark claims that the new tax could raise $6 million per year for the City. If so, the revenue from the tax would still be a far cry from the $150 million budget shortfall and, in any event, the $6 million may not materialize. Consider the experience of New Jersey and the District of Columbia. Since 2007, New Jersey has raised its cigarette tax by 17.5 cents and the District of Columbia by 50 cents, with the expectation of collecting tens of millions in revenues. Instead, after the cigarette tax hikes were implemented New Jersey and the District of Columbia reported shortfalls of $52 and $7 million respectively. The hoped-for revenues did not materialize because consumers either bought less of the more costly product or they bought it where they could get it more cheaply. Philadelphia would likely see consumers spend their money elsewhere, such as the tobacco shops and convenience stores in the neighboring suburbs of Bucks County where I grew up. So instead of raising revenue from tobacco taxes, Philadelphia would likely lose all of it.
The Council has until June to complete its work on the city’s budget. Let’s hope that Clark and his fellow legislators realize that the cigar and chewing tobacco tax will not bring in the revenue they seek, and that the path to fiscal stability lies in tax and budget reform.