Are You a Taxpayer?

Here are some of the ways cigarette taxes affect you:

States often collect far less revenue than projected from cigarette tax increases
When cigarette taxes go up, smokers increasingly find ways to evade paying the higher prices. They order from online sources, buy from black-market dealers or drive across the border to a neighboring state with lower prices. Not only do those lost sales hurt legitimate store owners, but the state loses the taxes from those sales. Consequently, states routinely find they do not collect nearly as much from a cigarette tax increase as they expected.
  • At the beginning of FY 2012 Hawaii increased its cigarette excise tax from $3.00 to $3.20 per pack to achieve an $8 million revenue gain. However, it looks like the policy backfired as Hawaii cigarette revenues skidded from $135.6 million in FY 2011 to $131 million in FY 2012. These revenues continued to shrink in FY 2013 to $120.1 million.
  • At the beginning of FY 2012 Connecticut increased its cigarette tax from $3.00 to $3.40 per pack. Connecticut was expecting an increase of about $44 million but the actual increase was only $21 million – a short fall of over 50%.
  • Washington increased its cigarette tax near the beginning of FY 2011 from $2.025 per pack to $3.025 - a $1 increase. Washington was expecting nearly $80 million in additional revenue but the actual increase was more like $45 million – a shortfall of close to 44%.Tax revenue is not always allocated as intended
    Supporters of cigarette tax increases often claim that the additional revenue will go toward tobacco use prevention programs. Yet some states have already proven that they do not always follow through on this promise.
  • Vermont increased its cigarette tax by 38 cents per pack in FY 2012 and was expecting its revenue to rise by $5.4 million or from $67.8 million in FY 2011 to $73.2 million in FY 2012. While Vermont actually achieved this goal in FY 2012, by FY 2013 cigarette revenues were actually lower ($67.4 million) than they were before the tax hike. This indicates that cigarette revenues can quickly become an unreliable source of revenue. This is especially true if the tax is earmarked to government programs that grow with time.

Each year, the states collect approximately $24 billion from tobacco taxes and the 1998 state tobacco settlement. Although the Centers for Disease Control and Prevention recommends that a modest 7 percent of this money – $1.5 billion – be spent on prevention programs, the states actually spend less than half of that relatively small amount.

Where have the other billions of dollars gone? Here are just a few of the items that the states have spent settlement money on:

  • In New York: dump trucks, golf carts, a golf-course irrigation system and a new county jail
  • In Virginia: broadband cable networks
  • In Nevada: upgrading public television stations with DVD technology
  • In Tennessee: balancing the state budget (using four years’ worth of settlement funds)
  • In Wisconsin: offsetting a budget shortfall (municipal bonds were issued, backed by future settlement money)
  • In Alaska: harbor renovation and museum expansion
  • In Kentucky: pasture and weather monitoring for a thoroughbred association

Higher cigarette taxes may increase gang and other organized crime
According to the U.S. Bureau of Alcohol, Tobacco and Firearms (ATF) tobacco smuggling (diversion) is a global problem, and illegal cigarettes are the number-one black-market commodity in the world.

An increase in tobacco taxes will escalate this already thriving underground market, making it more lucrative for gangs and other organized crime outfits to steal, smuggle and funnel black-market cigarettes to consumers. In fact, the higher the tax increase, the more lucrative the illicit profits made by criminals and the less legal profit made by retailers and wholesalers. Illegal sales also cut into revenue projections by state governments.

According to a Mackinac Center for Public Policy study (“Cigarette Taxes and Smuggling: A Statistical Analysis and Historical View,” 2008), there is a direct link between cigarette excise taxes and the import smuggling rate (casual and organized). This is due to a state’s high tax rate relative to surrounding states, and other considerations such as international borders and availability of counterfeit cigarettes. The top five states for consumption of smuggled cigarettes are:
State Smuggled Cigarettes as % of Consumption
Tax/ Other factors
CA 24.4 $.87/pack – Large counterfeit influx from China
NY 20.9 $2.75/pack – NYC $1.50 proximity to tax-free Indian reservations
AZ 20.6 $2.00/pack – Surrounded by lower-tax states
WA 20.1 $2.025/pack – Surrounded by lower-tax states
MI 16.0 $2.00 – Surrounded by lower-tax states

The World Health Organization’s Framework Convention on Tobacco Control estimates worldwide tax losses to governments to be between $40 billion and $50 billion per year. In the United States alone, $5 billion a year in tax revenue is lost to state and federal governments due to smuggling.

Cigarette sales are an unreliable source of income
Cigarette sales traditionally decline from 2 percent to 4 percent annually but have declined by almost 9 percent in 2009 due to the massive federal excise tax increase that year.

Contrary to what tax increase proponents say, much of the decrease is not due to smokers quitting, but rather smokers finding alternative sources of cigarettes. The bottom line is that cigarette taxes are a very unstable funding source, yet proponents often say they will use the additional revenues to pay for programs such as health care or education. Funding such important programs from a declining revenue source such as cigarette sales could lead to future budget shortfalls.

Higher taxes alone do not prevent youth smoking
When tobacco taxes are raised, smuggling and theft become more prevalent, enabling more and more adults and youths to obtain cigarettes through unregulated resources.

Higher taxes alone do not prevent youth smoking. Positive peer influence, parental guidance and smoking prevention programs do. Instead of penalizing adults who choose to smoke, government should focus on reducing youth smoking through proven methods.

Smokers may go out of their way to purchase less-expensive cigarettes
Studies show that revenues from increased state cigarette taxes often fall short of projections, partially because smokers will go out of their way to purchase less-expensive cigarettes via untaxed channels: international websites, Native American reservations and even the black market. In addition, revenue and sales for in-state merchants are lost when smokers travel across borders into states with cheaper cigarette taxes. And local store owners don’t lose just their tobacco sales. When customers travel to other stores, they will also make food, gas, beverage and other purchases at the same place they buy cigarettes. Retailer associations estimate that the loss from these extra sales alone is about 20 percent.

This tax avoidance often leads to state revenue projection losses for both cigarette excise taxes and sales taxes—making tobacco tax increases an inefficient means of creating revenue.