State Tax Trends: Cigarette Tax Increases Tapering Off

Washington, D.C., June 4, 2012—States seeking new tax revenue frequently target unpopular groups such as smokers, gamblers, and high-income earners. Recent trends, however, indicate an increasing dissatisfaction with such revenue-shifting. Enthusiasm for cigarette tax increases in particular appears to have cooled, according to a new analysis by the Tax Foundation.

As of January 1, 2012, the average state cigarette tax was $1.46 per pack, a hefty increase from the average of $1.18 just three years earlier and nearly ten times higher than it was a quarter century ago in 1983. In the last decade, 47 states and the District of Columbia have raised cigarette taxes a total of 105 times. In New York City, cigarette taxes alone are $5.85 per pack, while in Chicago they are $4.66 per pack.

These trends have slowed dramatically, however, with voters perhaps expressing that a ceiling has been reached on how high cigarette tax rates should go. Key considerations include the use of taxes on tobacco users to fund general government programs and the fact that cigarette taxes are one of the most regressive ways to fund government programs (low-income earners are much more likely to be smokers).

Cigarette tax increases are often justified as a way of compensating society for costs imposed by smokers. A series of studies, however, argue that nearly all the costs of smoking—health care, higher insurance premiums, lower productivity at work—are borne by smokers themselves.

“The reality is that most states support cigarette tax increases because they want more revenue,” said Tax Foundation Vice President for Legal & State Projects Joseph Henchman. “This is precisely why high cigarette taxes are poor tax policy – they allow the majority to shift the costs of government programs onto the minority.”

Higher cigarette taxes also mean more smuggling, as many states are learning. A pack of brand-name cigarettes can be had for as little as $1.25 in low-tax jurisdictions, but when smugglers move just one shipping container containing 200,000 packs into the U.S., the profit potential is $1 million per shipment.

Tax Foundation Fiscal Fact No. 304, “Trend #10: Cigarette Tax Increases Tapering Off” by Joseph Henchman is available online.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.