On Revenues and Referenda: Weighing Cigarette Tax Increases

Over the past 15 years, nearly every state has enacted a cigarette tax increase to fund health care, discourage smoking, or to help balance state budgets. While attempts to address health concerns have merit, the latter is bad public policy. This November, four states have cigarette and tobacco tax ballot measures up for consideration.  

The cigarette tax is a regressive tax that falls disproportionately on low-income taxpayers. These individuals spend more of their income on the tax than their wealthier neighbors, who also tend to be less likely to smoke. However, research has shown that cigarette taxes can be used to effectively discourage smoking, particularly among children and young adults. Every 10 percent increase in the price of cigarettes may reduce overall cigarette consumption by roughly 3 to 5 percent. This statistic is even more compelling for children and young adults who are two to three times more likely to stop smoking as a result of a price increase.

Taking a step back from the specific merits and drawbacks, the use of cigarette taxes to plug budget gaps is bad policy. Taxes exist primarily to help fund and support public services. Cigarette tax increases are often politically feasible and expedient revenue-raisers, and they can help do just that. However, there is a downside.

Aside from hitting low- and middle-income taxpayers harder than upper-income taxpayers, cigarette tax revenues grow more slowly than do most other taxes. This is partly due to the flat per-pack basis of the tax, which will not fluctuate with inflation and will remain stagnant absent policy change or a reversal of declining smoking rates. As a result, cigarette tax revenue declines over time and is unlikely to be sustainable in the long-run.

During 2016 legislative sessions, Louisiana, Pennsylvania, and West Virginia enacted cigarette tax increases to fill structural gaps and support ongoing expenses. While it was vital for these states to raise revenue amid growing shortfalls, broad-based tax changes could have provided a more stable, ongoing source of revenue.

Of the ballot measures up for consideration in California, Colorado, Missouri, and North Dakota, most are driven by health concerns and the realization of revenue savings that could result from reduced smoking rates rather than tools to raise revenue to address shortfalls or support ongoing expenditures.

Here’s a summary of the cigarette tax initiatives that taxpayers will vote on next month:

• California Proposition 56 calls for a $2-per-pack tax increase on cigarettes, an increase from the current state tax of $0.87 to $2.87-per-pack. Revenue raised would be redirected to health care for low-income Californians.

• Colorado Amendment 72 calls for a $1.75-per-pack tax increase on cigarettes, an increase from the current state tax of $0.84 to $2.59-per-pack. Revenue raised would fund a variety of programs, including medical research, cancer and smoking prevention, veteran health, and healthcare in rural and underserved areas.

• Missouri has two different cigarette tax initiatives on the ballot this year, each with quite different funding objectives:
  • Constitutional Amendment 3 calls for a $0.60-per-pack increase on cigarettes in $0.15 yearly increases by 2020, an increase from the current $0.17 state tax (the lowest in the nation) to $0.77-per-pack, and a $0.67-per-pack initial rate fee on tobacco wholesalers. Revenue raised would largely fund early childhood education programs, with additional funds going toward health care facilities and smoking prevention programs.
  • Proposition A calls for a gradual $0.23-per-pack tax increase on cigarettes by 2021, an increase from $0.17 to $0.40-per-pack, and an additional 5 percent sales tax for other tobacco products. Revenue raised would be placed in the state’s transportation infrastructure fund to repair roads.

• North Dakota Initiated Statutory Measure 4 calls for a $1.76-per-pack increase on cigarettes, an increase from the current state tax of $0.44 to $2.20-per-pack, and doubling the tax on other tobacco products from 28 percent to 56 percent. Revenue raised would be divvyed between two trust funds, one for community health and the other to support veteran health care services and programs.

For more information, read ITEP’s brief Cigarette Taxes: Issues and Options that looks at the advantages and disadvantages of cigarette taxes, and cigarette tax increases, as a source of state and local revenue.