Targeting so-called "sinful" behavoir with higher taxes has been a popular option for lawmakers trying to solve over-spending problems or start new programs. Instead of broad based income or sales tax increases or budget cuts lawmakers seek out certain groups that engage in habits society looks down upon. In this case, smoking. And why not. Smoking is bad for you, right? So let's increase the price to discourage consumption and as an added benefit we, the politicians, will have a new revenue source. New York, South Carolina, and Utah have jumped on this bandwagon and have enacted substantial tobacco tax increases which took effect yesterday. However, history shows that this spells bad news for budget outlooks as smokers flee to purchase their products in lower tax states.
New York now has the highest cigarette taxes in the country after the Legislature recently voted to add another $1.60 in state taxes to every pack in an . This brings the average price to about $9.20 state-wide, and to a whopping $11 per pack in the city. The bill also doubles smokeless tobacco taxes from 96 cents an ounce to $2 an ounce. Oh, and I forgot to mention the wholesale tax on cigars, dips and other kinds of tobacco will rise to 75 percent from 46 percent.
With numbers like this lawmakers have guaranteed more smuggling and are likely to bring in less than the $440 million they hope to collect. There is already evidence of storeowners in neighboring Pennsylvania gearing up for the influx of new smokers looking for a cheaper way to light up. The state has traditionally benefited from New York smokers because of its lower tobacco taxes, currently at $1.60 per pack. A smoke shop in Pike County, PA near the New York border reports that most of its customers are from New York or New Jersey. And now, with New York's new rate of $4.35 being slightly below the price of a generic pack in PA, including taxes, this trend will only continue.
Let's look back to 2002 when the state hiked its cigarette tax from $1.11 to $1.50 per pack. Over the next three years the state saw declining revenues each year, with the exception of 2003, showing a slight increase. In 2003 the state collected $1,258,312. By 2007 revenues had fallen to $981,861 as people most likely bought across state lines or kicked the habit. However, over this same time period Pennsylvania collected the same or slightly higher revenues than New York, even though its tax rates were lower.
South Carolina and Utah are raising their rates from 7 cents a pack to 57 cents and from 70 cents to $1.70 respectively. The same side effects can be expected as smokers flee to other low tax states or simply quit. South Carolina residents will most likely purchase in Georgia or North Carolina and Utahans can be expected to purchase in Colorado, Wyoming, Nevada or Idaho.
Overall, higher tobacco taxes have left many states with less than expected revenue as smoking rates decline and tax evasion increases. Yes, government revenues do sometimes increase in the first year or so after the tax, however those gains can prove short-lived as people react to price changes. The tax serves as a quick budget fix that does little to nothing in facing the state’s long term financial problems. New spending based on expected tobacco revenue creates shortfalls, which means that politicians will inevitably look to hike other taxes. So, when your state recommends a tobacco tax hike (and it’s just a matter of time, frankly), don’t be shy to point to a pesky thing called history when questioning the logic.