Media reports indicate the state House is formulating a tobacco tax package to raise an estimated $500 million. The proposal reflects Wolf’s original plan to raise cigarette taxes by $1.00 a pack. But higher taxes are the wrong prescription for Pennsylvania, and tobacco taxes are especially harmful for at least three reasons:
They hit the poor the hardest. Proponents of higher taxes often describe spending reductions as “balancing the budget on the backs of poor people.” Yet, that's exactly what cigarette tax hikes will do.
As professors Kevin Callison and Robert Kaestner make clear in a Cato Journal article, a tax increase will hurt the poor most of all, as a large percentage of their household income is spent on cigarettes:
From 2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000.
When two Cornell University economists studied the effects of this “sin” tax, they discovered an unintended consequence: larger food stamp rolls. This should not come as a surprise. Cigarette taxes are regressive and may very well push those around the poverty line into government programs.
Tobacco taxes are an unstable source of a revenue. The IFO predicts revenue from the current cigarette tax will fall by 3.6 percent in fiscal year 2017.
New York, which has the highest cigarette taxes in the country, saw revenue drop by $400 million over the past four years. While smoking did decline, it cannot account for the dramatic decrease in revenue. Smokers simply turned to the black market or neighboring states for cigarettes.
Higher taxes incentivize smuggling. Under the Republican proposal the state’s tax rate will be higher than four of our six bordering states, spiking cross-border shopping and cigarette smuggling.
According to the Mackinac Center, a 62.4 percent tax hike on cigarettes would spike smuggling rates from zero to 20.3 percent. To put it another way, approximately one of every five cigarettes consumed in the commonwealth would be illicit. Not surprisingly, the overwhelming majority of these cigarettes would come from distant, low-tax states like Virginia or the Carolinas.
The commonwealth already imposes a heavy tax burden on Pennsylvanians. Adding to it will only compound the state’s economic challenges without addressing the source of its fiscal woes.
Lawmakers can protect taxpayers by focusing on addressing cost drivers in the budget and putting together a spending plan based on available revenue.