Arizona is Hooked on Cigarette Tax Revenue

September 14, 2006

One of the most disturbing recent trends in state public finance is the increased reliance on cigarette taxes to fund public programs. The trend has developed because it is easy for politics to trump policy–and there are few classes of citizens with less political power than smokers. Politicians have been simultaneously unwilling to forego spending or raise broad-based taxes (i.e. taxes on sales or income) to pay for it, so they force smokers in many states to pick up the bill.

Rarely do we see an admission that the movement to increase cigarette taxes is politically motivated. In an article (subscription required) in today’s State Tax Today, however, a proponent of Arizona’s Proposition 203 (which would increase that state’s cigarette tax to fund, among other things, early childhood education programs) admits that politics drove their decision to use the cigarette tax as a funding vehicle:

“We polled on everything…(t)his was the thing that would be the most succesful in Arizona.”

Indeed, it’s no surprise that the public in Arizona would favor a cigarette tax increase above all else. On at least two prior occasions (Prop 200 in 1994 and Prop 303 in 2002), Arizona voters approved increases in the state’s cigarette tax.

This time, however, voters would not only be approving an increase in the state cigarette tax (from the current rate of $1.18 per pack to a new rate of $1.98 per pack) as well as increases in other tobacco products, but they would also approve the creation of a special “board” that would determine how the funds generated (~$150 million per year) would be spent. This board would be appointed by the governor and approved by the legislature.

Thus, not only will the money generated be spent by a board that is not directly accountable to the voters, but (more importantly) Prop 203 will bet the fiscal future of Arizona’s early childhood initiatives on a product that is steadily declining in use by Arizona’s citizens.

If Prop 203 passes, Arizona will once again shoulder the burden of expanding government on a narrow and relatively poor base of its citizens in the short-term, while putting pressure on an increase in broad-based taxes in the long-term. There are very few public finance economists who will say that such a trend is consistent with the economic principles of sound tax policy. Please click here to read a recent Tax Foundation report questioning the continued vitality of selective excise taxes like those levied on cigarettes.

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