Cigarette tax increases not producing desired revenues

Pennsylvania became the latest state to turn to cigarette taxes to cope with the need for more cash, advancing a bill that would allow Philadelphia to slap a $2 a pack tax on smokes.

The proposed tax is part of an emergency plan to fund the crumbling Philadelphia school district, but states are frequently finding that tobacco taxes don’t produce the hoped-for revenue.

While the Philadelphia tax increase, proposed by Mayor Michael Nutter, has not yet been approved by the full state Senate, reports have already surfaced about school funding inevitably declining in future years due to the tax’s withering effect on cigarette sales.

After the Philadelphia City Council’s approval of the cigarette tax last week, East Coast convenience store chain Wawa sent state officials material arguing that it would lead to “black market cigarettes,” “border bleed” for cigarette sales in Philadelphia and ultimately decreased revenue for Philadelphia’s schools.

Wawa denied that they opposed the cigarette tax increase.

State officials in Illinois recently admitted that last June’s $1 per pack tax increase on cigarettes has turned out to be 39 percent less than initial projections, leaving a shortfall of $130 million. A report released by the Commission on Government Forecasting and Accountability showed that lower cigarette sales as a result of the tax increase has contributed to the failure to meet the expected tax revenues.

Not only did consumers stop buying cigarettes as a result of the tax, but the report also noted that consumers stockpiled cigarettes before the increase. This could be considered an example of the Laffer Curve, which shows that higher tax rates can produce lower revenues as people change their behavior in response to economic incentives.

Four out of five states neighboring Illinois have lower cigarette taxes. Indiana’s cigarette tax is half that of Illinois’ tax, while Missouri’s tax, just $0.17 per pack, is the lowest in the country.