STATE PROVING IT CAN OVERTAX ECONOMIC ACTIVITY
August 31, 2007
New Jersey has secured another dubious distinction. It is the first state in the nation to experience a decline in cigarette tax revenues after increasing the cigarette tax, illustrating that it is possible to overtax an economic activity, says Gregg M. Edwards, president of the Center for Policy Research of New Jersey.
- To support the Fiscal Year 2007 state budget, Gov. John Corzine successfully proposed increasing the cigarette tax by 17.5 cents, from $2.40 to 2.575 per pack.
- It was the fourth tax increase in a six-year period and it made New Jersey's tax the highest state tax in the nation.
- In FY 2006, the cigarette tax raised more than $787 million.
- In FY 2007 -- after it was hiked by almost 7 percent -- the tax raised only $764 million, or $23 million less than the previous year.
While this result may seem surprising, it should have been expected, says Edwards:
- When costs are increased, rational producers and consumers will protect their economic interests.
- Workers will move to jurisdictions that tax their labor and wealth less and consumers will purchase goods in venues where prices are cheaper.
- It's not only the cigarette tax that illustrates this point; revenues from New Jersey's two largest taxes -- on income and sales -- also suggest that tax hikes aren't always as lucrative as expected.
Overall, New Jersey faces a $4 billion structural deficit. While this deficit was growing, New Jersey was raising taxes, says Edwards. Obviously, the increases have not solved New Jersey's fiscal problems. Indeed, the heavy reliance on cigarette tax increases actually worsened the fiscal difficulties.
Source: Greg M. Edwards, "State proving it can overtax economic activity," Asbury Park Press, August 19, 2007.
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