Out of Control Policy Blog

States Are Finally Turning Their Backs on Cigarette Taxes

After increasing cigarette taxes no fewer than 105 times in the last decade, it looks like states may finally be tiring of pounding smokers with higher rates every time budget trouble rolls around. The AP reported late last week that New Hampshire, New Jersey and Rhode Island are all considering lowering their cigarette excise taxes this year. These proposed reductions run from a mere $0.10 per pack in NH (which already has the lowest cigarette tax in New England) to $1 a pack in RI.

The push for lower taxes on smokes is being driven by the realization that tax tourism and smuggling might be hurting revenues while failing to keep cigarettes out of the hands of smokers. Cigarette taxes in the northeast are some of the highest in the country, so it's small wonder that frustrated smokers might go elsewhere for their fix.

This problem is especially visible in Rhode Island, which has the second highest cigarette tax in the country and the third highest level of net smuggling, according to this Mackinac Center analysis. Indeed, over 40 percent of the cigarettes consumed in the state are estimated to be illegal. By reducing the cigarette tax, Rhode Island lawmakers are betting that encouraging people to buy legal cigarettes will bump revenues enough to overcome the effect of the lower tax rate itself.

A rate reduction might even generate some new business for Rhode Island retailers. Smokers would pay only $2.46 per pack were the reduction to go through, well below neighboring Connecticut's $3 levy. This, in turn, would create further tax revenues.

New Hampshire has less to gain from their reduction -- a $0.10 per pack drop, or $1 per carton is not likely to discourage people who already get their smokes illegally to stop doing so. It's alsouncertain whether it would encourage more out-of-state smokers to come buy in New Hampshire.

Still, it's a good sign, purely on philosophical grounds, that legislatures are moving away from cigarette taxes. Research has shown again and again that cigarette taxes are regressive -- they take proportionally more money from the poor than the rich. Moreover, they're unfair; why should people have to take on more of the burden of funding government (by paying an extra excise tax) just because they consume a socially unpopular product?

The common counter-argument on the left, that smokers should be taxed to compensate society for the money it spends treating their smoking-induced health problems, doesn't make a lot of sense. That's because not everyone who smokes will contract a costly illness; thus, they exert no economic harm on society at large and the tax money the government wrings from them is pure profit.

If public health advocates are concerned about people burdening society with the costs of their risky behavior, the conclusion is simple: allow people to bear more of those costs for themselves. Not only does that disincentivize risky behavior in the first place, it means no third party is on the hook for the consequences of someone's actions.

Although recent developments in health care policy haven't put us any closer to such a system, that's no excuse for relying on cigarette taxes to punish smokers. We're lucky that some states are starting to realize that.

David Godow is Research Assistant


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