August 23, 2005

Cigarette Taxes as a Revenue Stream

Lawmakers in Oklahoma are learning a painful but valuable lesson - cigarette taxes cannot be counted on as a long-term, reliable revenue source. As reported by the BNA:
Last fall, Oklahoma voters approved an 80-cent-per-pack increase in the cigarette tax, raising the rate from 23 cents to $1.03. The increase was projected to raise an additional $200 million annually but a shortfall has been running for seven consecutive months, according to Rep. Kris Steele (R),chairman of the House Health and Human Services Committee.

Not only are cigarette taxes regressive, they provide a slow-growth revenue source, as an excerpt from ITEP's Policy Brief, "Cigarette Taxes: Issues and Options" explains:
Over time, cigarette tax revenues grow more slowly than do most other taxes. This is partially because these taxes are usually calculated on a per-pack basis: a 25-cent-per-pack tax will always yield the same amount of tax revenue for each pack. (By contrast, general sales taxes are calculated as a percentage of the sales price of a taxableitem. This means that when inflation drives prices up, sales tax revenues will automatically increase, but cigarette tax revenues will not.)

Given that cigarette taxes in Oklahoma are earmarked to fund public health initiatives (which increase in cost over time), this funding scheme was doomed to failure at its conception. You simply can't fund a program that increases in cost each year (such as public health) with a revenue source that doesn't match the program's cost growth (such as cigarette taxes).

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