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Thursday, March 26, 2009
11:19 AM EDT
Kelly William Cobb

Tobacco Taxes: How Many Times Do We Have To Say "I Told You So"?

Last month, Arkansas was the latest state to pass a tax hike on cigarettes.  The new $1.15 per pack tax was passed on the heels of President Obama's federal cigarette tax increase and raised the tax significantly higher than neighboring states, which collectively average 63-cents.

Throughout the battle, Americans for Tax Reform and numerous other opponents argued that this tax will never raise the $86 million the state was projecting (here, here, and here).  As It turns out, we were right.

Yesterday, the state's Finance and Administration Director Richard Weiss informed lawmakers that the state will take in $14 million less than projected from the tobacco tax increase - just one month after it passed.  This probably came as a surprise to Governor Mike Beebe (D), who said in his State of the State address that “tobacco taxes are a dwindling revenue stream," but quickly forgot when he began touring the state advocating for the supposed $86 million in new taxes.

Raising cigarette taxes is not only unfair for smokers and small businesses; it's flat out bad public policy. Revenue from tobacco taxes is exceptionally volatile. Smokers, behaving rationally, frequently cross state lines to find cigarettes at cheaper rates. Additionally, tobacco taxes are a declining revenue source that prompts future tax hikes once lawmakers become reliant on the statically budgeted revenue stream.

Moreover, proponents of cigarette taxes show a complete lack of understanding of basic economics.  It is absurd to argue, as most tax hikers do, that a cigarette tax will increase tax revenues and simultaneously decrease the number of people buying cigarettes - when prices go up from a tax, consumption declines, and it takes the new tax revenue with it.  This, by the way, goes for all tax increases.
 
There are 28 states this year looking to smokers to solve their overspending problems.  This includes a proposed 12.5-cent per pack tax hike by Gov. Corzine (D) in New Jersey, where the last time they raised the tax just 17.5-cents they actually had a net loss of $24 million.  And in Maryland, which doubled the tax last year only to see a 25% decrease in cigarette consumption and a 254% increase in cigarettes smuggled across state lines.
 
Lawmakers take heed: taking money out of the pockets of the 20% of Americans who smoke cigarettes will only leave you scratching your head and wondering why your budget problems are worse off than before you raised the tax.
Posted by Kelly William Cobb on Thursday, March 26, 2009 11:19 AM EDT
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