Cigarette Taxes in the News Again

A bullet was dodged this week when a ballot initiative in Missouri to increase the cigarette tax by 80 cents failed to garner enough signatures to make the November ballot. Many proponents of these increases argue that they are an effective way increase health care funding, which is a laudable goal. However, cigarette taxes are a poor choice for states looking for long-term stable funding for health care.

Since taxes on cigarettes are levied on a per-pack basis, revenues from cigarette taxes decline sharply over time. General sales taxes, in contrast, do not face this problem, since such taxes are calculated as a percentage of the sales price of a taxable item. This means that when inflation drives prices up, sales tax revenues will automatically increase, but cigarette tax revenues will not: a 25-cent-per-pack tax will always yield the same amount of tax revenue for each pack. The only way for the amount of revenue generated by cigarette taxes to increase without lawmakers increasing the per-pack tax is for smoking rates to increase, the opposite of the law’s goal.

More importantly trends show that cigarette consumption rates are on the decline. This is good news for state health care systems. Unfortunately, this declining base will result in less revenue each year being available for health care. A shrinking tax base makes a poor choice when looking to fund health over the long haul.

Finally, cigarette taxes are very regressive, forcing low-income smokers to pay a much higher percentage of their income in cigarette taxes than high-income smokers. A 2005 policy brief by the Institute on Taxation and Economic Policy showed that cigarette taxes are ten times more burdensome for low-income smokers than for the wealthy. But this doesn't stop lawmakers and voters from trying to find sustainable revenue this way.

In Indiana, Governor Daniels vowed to introduce legislation to increase the state’s cigarette tax when lawmakers return in January. This year, a ballot initiative in California put Proposition 86 on the ballot. Proposition 86 would increase the price of cigarettes in that state by 13 cents a cigarette, increasing average pack prices to $6.50. All three proposals are to be commended for trying to increase funding for health care. However, voters and legislatures in all three states would do well to increase tax revenues in a way that is both reliable and fair.