Tax and Nicotine: Seeking Any Means Available to Raise Revenue, Southeastern States-Like Their Counterparts across the Nation-Have Been Raising the Tax Rate on Cigarettes, Sometimes Dramatically. but between Smoking-Cessation Initiatives and the Higher Cost of Lighting Up, the Number of Smokers Has Been Declining. in the Long Run, How Reliable Is This Revenue Stream for State Governments?

By English, Ed | EconSouth, Summer 2011 | Go to article overview

Tax and Nicotine: Seeking Any Means Available to Raise Revenue, Southeastern States-Like Their Counterparts across the Nation-Have Been Raising the Tax Rate on Cigarettes, Sometimes Dramatically. but between Smoking-Cessation Initiatives and the Higher Cost of Lighting Up, the Number of Smokers Has Been Declining. in the Long Run, How Reliable Is This Revenue Stream for State Governments?


English, Ed, EconSouth


Once Iowa levied the first state excise tax on cigarettes in 1921, 68 years passed before all 50 states had a similar tax in place. But just as there was no unanimity on the timeline for implementing a cigarette tax, no consensus exists today among states for setting the rate for that tax.

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As political battles go, setting the tax rate on cigarettes is a conflict worthy of the proverbial smoke-filled room. Support for raising cigarette tax rates generally comes from lawmakers seeking to offset tobacco-related health costs as well as an array of health organizations hoping to reduce the smoking population. Opposition to taxing tobacco tends to come from lawmakers who vow to fight any new tax, reflecting the antitax fervor of the 2010 national elections. Opposition also comes from industries that stand to profit from tobacco sales, including growers, manufacturers, and retailers.

While each of these groups pursues its own end with the cigarette tax rate, one underlying question persists: What effect will each state's decision have on its bottom line?

Hurting for cash: where to turn?

States have increasingly felt a budgetary pinch caused by smaller-than-forecast revenues in the wake of the recent recession and the shifting of funding for some programs from the federal government to the states. According to the Center on Budget and Policy Priorities (CBPP), a nonprofit policy organization, budget shortfalls for 2012 are the norm for the Southeast and the nation. Florida's forecast shortfall of $3.6 billion is equal to 14.9 percent of its 2011 budget. Louisiana has a $1.6 billion shortfall (20.7 percent of its 2011 budget) looming, Georgia faces a $1.3 billion shortfall (7.9 percent), Alabama has to close a $980 million budget gap (13.9 percent), and Mississippi's budget is staring at a $634 million shortfall (14.1 percent). Tennessee's projected 2012 shortfall is not available, but the state had a $1 billion shortfall in 2011, equal to 9.4 percent of its 2011 budget. CBPP forecasts the national average of 2012 shortfall to 2011 budget at 17.6 percent.

Raising tax rates on cigarettes to reduce the deficits is attractive for multiple reasons, according to Mark Robyn, an economist at the Tax Foundation in Washington, D.C.

"[Raising cigarette taxes] is a target right now because it's aimed at a not politically favored group," Robyn said. "It's a minority of the population. It's not a very sympathetic group. Politically, it's just very easy." Whereas raising taxes--never a politically palatable undertaking-is especially difficult in a slow economy, raising the cigarette tax is one of the few taxes that is politically viable, Robyn added.

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Tobacco has certainly been in the taxation crosshairs recently in the Southeast. The legislatures of Alabama (House Bill 457) and Louisiana (House Bill 63) have active bills under consideration. Georgia's legislative assembly ended its 2011 spring session without a bill reaching the floor, although Ron Stephens (R-Savannah), backed by a number of health and medical associations, tried to muster support for a tax increase of $1 per pack, raising the rate from $.037 to $1.37, according to WTOC-TV in Savannah. In 2010, Florida accomplished what Stephens sought, a $1 tax hike, from $0.34 to $1.34 per pack. Mississippi more than tripled its cigarette tax in 2009, jumping from $0.18 to $0.68 per pack. The year before, Tennessee enacted a slightly smaller increase, from $0.20 to $0.62 per pack.

Building the cases

Defenders of these recent initiatives to hike cigarette taxes point to statistics from the Centers for Disease Control and Prevention (CDC) about the costs smokers have on a population. The total economic costs (direct medical costs along with lost productivity) associated with cigarette smoking are estimated at $10. …

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Tax and Nicotine: Seeking Any Means Available to Raise Revenue, Southeastern States-Like Their Counterparts across the Nation-Have Been Raising the Tax Rate on Cigarettes, Sometimes Dramatically. but between Smoking-Cessation Initiatives and the Higher Cost of Lighting Up, the Number of Smokers Has Been Declining. in the Long Run, How Reliable Is This Revenue Stream for State Governments?
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