NCPA - National Center for Policy Analysis


September 15, 2009

Smokers have become a favorite target of many legislators across the country.  Some policymakers seem to think taxing smokers is a win-win way to curb smoking and raise revenue, without hurting the economy.  In practice, however, these taxes create more budget problems than they solve.  As the tobacco tax revenue stream falls short of expectations, which it invariably does, budget deficits grow ... and many of these tax supporters begin singing a different tune, says the Heartland Institute.

It's interesting, for example, that smoking cessation programs -- a "public health" justification often linked to tobacco tax hikes -- are in many cases being de-funded.   When that happens, the tobacco tax itself is left in place, its revenues diverted to general funds in order to help shore up a budget shortfall or pay for entirely unrelated programs.

The hypocrisy surrounding tobacco taxes doesn't end there.  Moreover, they are not the boon many people believe them to be, for the following reasons, says Heartland:

  • They are regressive and disproportionately burden lower- and middle-income people -- not only are lower-income earners more likely to smoke, they also smoke more frequently; they bear more of the tax burden than higher-income earners, in absolute terms and as a percentage of income.
  • They are an unreliable and unsustainable source of revenue and don't structurally fix budget deficits -- many states rely on these revenues to balance their budgets, year in and year out; more than 20 states are considering tax hikes to fill current budget holes but tobacco tax hikes don't address what's causing the holes in the first place.
  • They hurt local businesses and the overall economy -- Hav-A-Tampa cigar closed its factory in Florida and laid off about 495 employees this summer due to the federal excise tax hike on tobacco products signed earlier this year by President Barack Obama; many people travel outside the state to buy their tobacco products, and they are likely to make other purchases out of state as well, thereby hurting local businesses.
  • They encourage cross-border, black market, and Internet purchases -- as tobacco taxes have risen, so has tax evasion; the Mackinac Center reports tax-induced smuggling has become so widespread that it "undermines both the revenue and health goals of higher cigarette taxes, while producing unintended consequences for individual states and American society as a whole."

The use of targeted tax increases serves only to push sound fiscal policies and real budget reforms to the public policy back burner.  Legislators concerned with the public health effects of tobacco should encourage the use of readily available smoking cessation products and services, instead of supporting bad tax policy, says Heartland.

Source: John Nothdurft, "Top Ten Reasons Not to Raise Tobacco Taxes," Heartland Institute, September 11, 2009.


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