Today's Federal Tobacco Tax Hike Will Drain State Coffers

April 01, 2009

The Wall Street Journal published an op-ed this morning by economist Brad Shiller on the new federal tobacco tax hike. Shiller claims that with this tax hike, a 62-cent hike per pack that took effect today, Obama broke his campaign promise not to raise taxes on low-income people.

It's true that most smokers earn little. In fact, no popular consumer product has such a low-income customer base as tobacco.

The Obama administration might reply that his no-new-tax promise to the poor and middle class was only about income taxes, and that the president has already signed a temporary, two-year tax cut for low- and middle-income workers, the so-called Making Work Pay credit of $400 per worker. A smoker might retort that $400 doesn't cover the tobacco taxes he's paying now: $1.01 per pack to the federal government and an average of $1.18 per pack plus sales tax to state government.

Shiller goes on to quote Tax Foundation chief economist Patrick Fleenor's new Fiscal Fact on how much state governments will lose in tax revenue when the federal government horns in on tobacco tax revenue like this. Here's the Fiscal Fact which estimates the revenue losses by source and by state.

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