Black Markets vs. Cigarette Taxes

June 6, 2005

Colorado passed a 64 cent per pack increase in its cigarette tax last week. The new revenue is earmarked for specific programs (See article here):

The tax is expected to bring in $62.9 million this fiscal year and $169.2 million next year. The spending plan allocates about $140 million of the new revenues annually to expand cancer screening and treatment, target young smokers and make health care more accessible and affordable.

Earmarking expected tax revenue can lead to under-funded programs because of inaccurate revenue estimates. Cigarette tax revenue estimates are often the most difficult to project accurately because of the incentives they create for smokers to purchase cigarettes from alternative vendors. Smokers can travel to other states or buy on the black market, or as an increasing number are doing, purchase cigarettes via the internet.

Colorado and other states need to be aware that smokers have additional methods of buying cigarettes today. See the Tax Foundation’s new paper by Prof. Richard Wagner on the taxation of cigarettes here.

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