March 08, 2005

Cigarette Taxes. Again.

Here's a thumbnail sketch of the recent tax policy debate in one midwestern state:

As budget season starts, the state government faces a big projected budget deficit for the upcoming fiscal year. In the wake of a couple of years of austerity budgets that have cut spending to the bone, further spending cuts are no longer feasible as a budget-balancing solution. But the governor doesn't have the guts to propose general tax hikes , so s/he proposes a cigarette tax hike.

Pop quiz: in which midwestern state is this plot line NOT unfolding?
A) Illinois
B) Iowa
C) Michigan
D) Minnesota
E) Indiana

The answer: Indiana, where Gov. Mitch Daniels has better ideas (about which more in a separate post). Illinois, Iowa and Minnesota all have governors who have proposed (or have signaled their willingness to accept) cig tax hikes this year. Michigan's Governor Jennifer Granholm has not done so-- but only because she pushed through a 75 cents-per pack hike last year.

Taxing cigarettes is not an entirely bad thing. Smoking imposes some major social costs, and there's a lot of evidence that higher tax rates will encourage a lot of people to quit. In that sense, the cig tax is a decent social policy tool.

But these midwestern governors are not interested in using cig taxes as a social policy tool-- they're using them as a fiscal policy tool. They want to use the revenue from these taxes to pay for state construction projects (in Illinois), Medicaid spending (Iowa) or offsetting tax cuts (Minnesota).

This is a bad thing simply because cigarette taxes tend not to grow much over time. Unless you change the tax rate, the only thing that makes cigarette tax revenues go up is an increase in consumption. But that's not happening now, and hasn't been happening for about 30 years.

So in the long run, cigarette taxes will decline-- even as state spending on construction and health care continues to grow. Which means the states will have to find some other way of paying for all that good stuff they promised us.

Think Illinois taxpayers are skeptical of government now? Wait five years (or less) and see what they think when the next governor informs them that cig taxes weren't sufficient to pay for all that construction they were promised.


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