Cigarette tax increases not producing desired revenues

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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.

Fox Chicago reports that a lead investigator for the Illinois Department of Revenue has confirmed that street gang involvement in cigarette smuggling across state lines is increasing. A University of Illinois at Chicago study also discovered that 75 percent of cigarettes in Chicago lacked city tax stamps and were presumably “smuggled” over state lines.

Though Chicago has had a mixed experience with the policy, the sponsor of Philadelphia’s tax increase, Pennsylvania state Sen. Anthony Williams, told The Daily Caller News Foundation that according to the Chicago study, “what happened in Chicago was not identical to what happened in New York,  so we should not assume it would accurately reflect what would happen in Philadelphia, either.” Williams added that the Philadelphia cigarette tax “is not a panacea — it’s part of a host of measures” to increase funding for Philadelphia schools.

Revenues from cigarette taxes are not the only thing the legislation affects. Proponents have argued that the tax increases are justified because they reduce smoking. It was on these grounds that Center for Disease Control Director Tom Frieden supported President Barack Obama’s proposal for a federal cigarette tax increase in April. Frieden told reporters at The Washington Post that “increasing the price of tobacco is the single most effective way to discourage kids from smoking.”

Frank Chaloupka of the University of Illinois at Chicago affirmed this idea, noting that studies have “clearly and consistently demonstrated that higher cigarette and other tobacco product prices reduce tobacco use.”

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