Rhode Island Governor Don Carcieri (R) last week outlined his proposal to address the state’s budget shortfall. Not mentioned in the speech, but included in the supporting documents, is a 40% hike in the state cigarette 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. .
The increase would take Rhode Island’s cigarette tax to $3.46 (from $2.46), the highest in the country. Rhode Island currently has the second highest state cigarette tax rate. The increase is expected to generate $17 million for the remainder of the current fiscal year.
2009 will likely see many of these targeted taxes on unpopular groups. Such actions are politically safe for politicians but distort economic decision-making, invite retaliation from other states, and ultimately harm economic activity and commerce. Shifting tax burdens from the majority to a minority artificially lowers the perceived cost of government, which can result in state citizens demanding more government services than they are actually willing to pay for. Additionally, many of these revenue sources such as cigarette taxes are unstable and increasing state reliance on them can cause budget problems down the line.
(A side note: we are honored that Gov. Carcieri mentioned our State-Local Tax Burdens rankings in his speech. Governors and legislators need to keep in mind interstate competition for capital and jobs as they craft tax systems.)
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