Washington cigarette tax hike results in decreased revenues as smokers buy outside city limits

The District of Columbia’s Chief Financial Officer Natwar Gandhi learned a hard lesson this week after assessing the fiscal forecast for 2010: D.C. smokers weren’t happy with the city council after it upped the cost of cigarettes, and responded by depriving the District of millions in tax revenue.

Any nicotine fiend who’s dodged puddles of upchuck in Adams Morgan on a Friday night or maintained a distance of 30 feet from downtown office buildings on a weekday could have predicted that smokers would flee to Maryland and Virginia. And according to a report released Wednesday by Gandhi, that’s exactly what happened after the D.C. Council raised taxes on cigarettes from $2.00 to $2.50 a pack in mid 2009.

In a report addressed to D.C. Council Chairman Vincent Gray and Mayor Adrian Fenty, Gandhi wrote, “The 50-cent increase in the cigarette tax rate was projected to increase revenue but also decrease volume. Collections year-to-date point to a more severe drop in volume than projected.”

How severe?

“The estimate for cigarette tax revenue is revised downwards by $15.4 million in [fiscal year] 2010 and $15.2 million in [fiscal year] 2011.”

Annie Chen, the owner of North Sea China Restaurant on 18th St. NW, noticed the drop almost immediately: Since the tax increase was put into effect, Chen has sold smokes to her customers in Adams Morgan at a pre-increase price. “Some places sell for $8,” she slyly reminded me Wednesday night. “But we sell for $7.30. Otherwise you all go to Virginia and Maryland.”

North Sea doesn’t rely on cigarette sales — that’s what the food is for — but the extra revenue is significant enough that Chen would rather reduce her profit margin than lose customers. “I just want to make customers happy,” she said.

Smoking commuters have always fallen into two distinct camps: those who are willing to buy their cigarettes in D.C. despite the high costs, and those who religiously wait until they’re back home in Maryland or Virginia to stock up. Washington City Paper reporter Mike DeBonis suspects that Gandhi and the council failed to take this possibility seriously during a closed-door meeting in July 2009.

“The cigarette tax was literally a no-brainer. I don’t remember much debate at all,” DeBonis, who also covered the tax, wrote in an e-mail. “Part of the blame, if not most of the blame, is on the CFO people who made the cig-tax revenue estimate. Somehow they forgot to consider that Maryland smokers would defect.”

In Wednesday’s report, the CFO’s office expressed frustration that the tax hike hadn’t gone as planned, and suggested that all it had in the way of an explanation was “anecdotal evidence” that Maryland residents, who paid more for cigarettes in their home state prior to the hike in D.C., “have shifted purchases back to Maryland now that District taxes are higher.”

A staffer at the CFO’s office spoke to the Daily Caller on background about the agency’s attempt to find a sweet spot between taxing too little and driving people to other purchase in other states. “The anticipation was that we’d lose some smokers and we’ll collect more money from the people who keep buying,” the staffer said, citing Virginia as an example of a state that has dealt well with increasing excise taxes. “When the federal excise tax went up, Virginia assumed a 12 percent decline. They’ve seen about  7 percent decline.” The staffer also said that the CFO’s office is aware that “Buyers will go where the price is cheapest.”

In the conclusion to his section on the cigarette tax hike, Gandhi seemed to acknowledge this economic reality as well, writing, “Future increases in the tax rate will likely generate less revenue rather than more.”

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  • gecrane442

    Its getting cheaper to smoke wacky backy instead of cigs

  • havesomesense

    Man, politicians are stupid! The idiots here in Massachusetts did the same thing claiming they’d see a revenue windfall – results aren’t in yet, but I can predict the outcome (especially with “tax free” New Hampshire just a stone’s throw away for 1/3 of the population.


  • windrdr

    The line “The cigarette tax was a no-brainer” pretty much sums it up. There’s no political price to pay for screwing a definite majority of the population, particularly when you’ve successfully demonized their particular vice/preference with the vast majority. Hence, among politicians, cigarettes/tobacco is seen as only one thing – a cash cow. Please, don’t tell me that you’ve actually bought into the bogus rationalization for doing so, that it is to “pay” for the related health expenses further down the road. Those funds are generally raided and dispersed to other pet projects faster than a chain smoker can polish off a pack of Marlboro Lights, and the vast majority of smokers will end up paying their own health care costs (or via their insurers).

    It’s a nanny-state line of logic all the way. Smugly approve, non-smokers, but be ready for the smokers to laugh their asses off at you when you show up at a restaurant and a government minder wants to charge you for a shake of salt, or the extra bacon on your cheeseburger “for your own good” and so “everyone else isn’t paying for your unhealthy choice” – particularly if health care becomes nationalized, and the nanny-staters are given the opportunity.

    Once again, for a preview of coming attractions, simply look to the UK. It’s already happening there.

    • windrdr

      oops – should be ‘screw a definate MINORITY’

  • monkeybird

    I don’t smoke, but I do wonder why it is always cigarettes. Why not booze? Think of the revenue!

    • badmotherfarker

      Extra taxes are levied against alcohol. You know, to “discourage drinking”. Sin taxes always annoy the hell out of me. The claims that it’s to “dicourage use” are farking retarded. Just say it like it is – it’s extra taxes against a minority population that, statistically, is less likely to vote.

    • havesomesense

      Come to Massachusetts. Not only do we have high taxes on alcohol, but in 2009 the geniuses in our state legislature changed the law so that sales tax is calculated after the alcohol tax.

      Yes, you read that right, WE ARE TAXED ON THE TAX!!!

  • davchaz

    Punitive taxes levied on people who have an alternate market will always result in a LOSS of revenue as customers flee to where the prices are more competitive!

  • thebigodoopedu2

    Time to grow our own. Why not grow tobacco bring it to the growers market and sale it..

    • badmotherfarker

      Same reason you can’t do that with alcohol. The government doesn’t want competition because they make a LOT of money in the sin business.

    • thephranc

      Use to be able to in Upper Marlboro MD before the state bought out all the tobacco farms.

  • thephranc

    If you raise taxes people go some where else? Who could have ever imagined that would happen?