Kentucky, like many states, is facing a budget shortfall, but of rather modest size. Out of a $19 billion two-year budget, the current budget has a $456 million hole with six months to go. Governor Steve Beshear (D) last week announced a plan to close it with very modest spending cuts ($147 million), using rainy day funds ($179 million), and a 233% hike in cigarette taxes ($81 million).
Kentucky residents today pay 30 cents per pack in state excise taxes, along with a 10 cent per pack “fee” paid by cigarette retailers and the 39 cent federal excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. . Beshear’s proposal will hike the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. to $1.00, which is amazing considering it was just 3 cents as recently as 2005. That politicians see cigarette excise taxes as a bottomless well of easy revenue isn’t new, I suppose; New York City residents back in 2000 paid just 56 cents per pack in tax, and now pay $4.25 in tax (the highest in the U.S.). That’s an average of 29% inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. per year.
The only purpose of specific taxes on tobacco products is to pay for the costs smoking imposes on others. Studies are a mixed bag on how much those costs are, with the lost lives and health care costs weighed against lower Social Security and Medicare costs from early deaths and the personal enjoyment that smokers get from smoking. Cigarette tax proponents should quantify how much the tax rate should be in their state to pay for net costs, and in some cases it may be a negative number. The state’s revenue situation is irrelevant to determining the correct excise tax rate.
Kentucky of course is not alone. Virginia Governor Tim Kaine (D) has proposed a 100% increase (from 30 cents to 60 cents) and South Carolina Governor Mark Sanford (R) has proposed a 400% increase (from 7 cents to 37 cents) as part of a comprehensive tax reform package. Below is a map of the per-pack cigarette tax rates of the mid-Atlantic states and their neighbors. They say smuggling makes driving a truck of cigarettes a very dangerous job, and as states hike their taxes, the illicit profits to be made might mean a lot of smuggling.
