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States reach for cigarette taxes to ease budgetary worries, but problems loom

By   /   February 17, 2016  /   News  /   No Comments

Old-time cigarette ads tend to give the impression that smoking can cure almost any malady.

The tagline on a series of ads in the 1930s told waistline-conscious readers to “reach for a Lucky” when they felt tempted to over-indulge with food or drink, lest they put on extra pounds.

Image from Flickr

GET LUCKY: Faced with over-indulgent spending plans and mounting budgetary stresses, governors and state lawmakers are are reaching for the cigarette taxes.

A Camel ad from the 1950s advised having a smoke “when stubborn annoyances bother you” to relieve stress and headaches.

Knowing what we know now about the health risks that come with smoking, these types of advertisements are cringe-inducing – and illegal – at best, leaving you shaking your head at what passed as top-notch marketing in decades past. But despite all the facts, state governments from coast-to-coast are preparing to believe those same misleading promises.

Faced with over-indulgent spending plans and mounting budgetary stresses, they are reaching for the cigarettes.

Nine states increased cigarette taxes during 2015, but governors and state lawmakers in several capitals want to soak smokers for even more this year. While cigarette taxes traditionally have been used to fund state health care programs or anti-smoking initiatives, several states are hoping to get smokers to pay for everything from road repairs to early childhood education.

Both of those options are on the table in Missouri.

One plan would raise the cigarette tax in Missouri by a whopping 300 percent (from 17 cents per pack to 67 cents per pack), with the estimated $250 million windfall directed to early childhood education programs. A competing proposal in the state legislature would see a smaller increase – to 40 cents per pack – with the estimated $100 million in revenue directed to road and bridge repairs.

Backers of both efforts are trying to get the proposals on the ballot for November, when Missouri voters would get to have a say.

In Indiana, lawmakers are kicking around the idea of using higher cigarette taxes to fund road repairs. The $1 per-pack increase is seen by some lawmakers as a way to increase highway funding — a priority for Republican Gov. Mike Pence — without broad-based tax increases.

Pence has criticized the plan to increase the cigarette tax, which passed the state House earlier this month with bipartisan support but has received a lukewarm reception in the Senate.

In West Virginia, Democratic Gov. Earl Ray Tomblin used his annual budget address to pitch a plan to raise the cigarette tax by 81 percent (from the current rate of 55 cents per pack to $1 per pack) to generate $43 million. The money would be used to fill a shortfall in the state employees’ health insurance program.

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LIGHT EM UP: Several states are considering cigarette tax increases to fund programs such as early childhood education and road repairs. That could cause problems as cigarette tax revenue declines in future years.

Similarly, lawmakers in Louisiana are mulling a proposed 25 percent increase to the state cigarette tax that could generate an additional $81 million in a year when the state is facing a $700 million budget deficit.

Wrong-way revenue

Experts say there are a number of reasons states should shy away from balancing budgets and funding new programs on the backs of smokers.

“If you’re using excise taxes or ‘sin taxes’ right, it should go towards things like smoking cessation programs or public health spending tied directly to smoking,” said Scott Drenkard, the director of state projects at the Tax Foundation, a nonpartisan Washington, D.C., think tank. “Unfortunately, you have politicians controlling where the money is spent, rather than economists.”

For starters, cigarette taxes are fundamentally regressive. That’s even truer today than it was in decades past, as rates of smoking have fallen off more sharply among the well-off than among the poor. Cigarette taxes also hit minorities, who smoke at higher rates than whites.

When it comes to policies that benefit all — like education and roads — all taxpayers should contribute, rather than expecting a small, unpopular group of people with a nicotine habit to pick up the tab for popular services, Drenkard says.

Another problem: taxes on cigarettes provide a revenue stream that is likely to decline in future years, as more Americans kick the habit.

Indeed, that’s part of the justification for passing higher cigarette taxes nearly everywhere they are introduced: to get people to quit.

“One of the things we know from science is that one of the most effective ways to decrease tobacco and cigarette consumption is to raise the price point of the product,” Oklahoma Health Commissioner Terry Cline told the The Oklahoman newspaper. GOP Gov. Mary Fallin has proposed a 145 percent increase in cigarette taxes (from $1.03 per pack to $2.53 per pack) to generate $181 million that she says is necessary to balance the state budget.

Source: The Tax Foundation

MANAGING THE DECLINE: Tobacco use has been steadily declining for the past few decades, so states should expect revenue from tobacco taxes to decline in the future as well. Using cigarette taxes to fund ongoing programs is a recipe for deficits.

In Indiana, proponents of the tax say the 10 percent increase could drive down smoking rates by as much as 4 percent in adults and 13 percent for youths.

Cigarette tax revenue tied to public health programs meant to alleviate the effects of smoking or to help people quit don’t create a budget problem. As the number of smokers dwindles, the revenue from taxes will decline and so will the need for the programs those taxes are funding.

Most other government programs, however, go the other direction. Roads and schools are two costs in state budgets that are nearly always increasing. Using a revenue stream likely to decline in future years to create a new early childhood education program or to prop up poor infrastructure is a recipe for future deficits. The same is true in places where cigarette tax revenue is being tossed into the black hole of state employee retirement benefits or being used to fill general budget gaps.

States are not the only ones suggesting cigarette taxes be used for unrelated spending. President Barack Obama suggested in his 2013 State of the Union address, that an increase in the federal cigarette tax (currently $1.01 per pack) be used to pay for a national preschool program for four-year-olds.

Perhaps because the White House knew a program like that would mean higher costs and lower revenues in future years, the proposal would have passed that funding gap to the states.

States now looking to use cigarette taxes to fund long-term government spending will likely need to have a similar plan to stick someone else with the bill.