Cigarette Taxes Approaching Tipping Point

September 7, 2007

Tax Foundation Chief Economist Patrick Fleenor appears in a Wall Street Journal editorial today that analyzes the cigarette smuggling becoming more common with federal and state hikes in cigarette taxes:

Something similar is going on all over the U.S., where cigarette taxes have on average tripled in the last decade, but treasuries aren’t getting the revenue boost. For consumers, tax-free online cigarettes are only a mouse click away, and these purchases now cost the states more than $1 billion a year in lost tobacco taxes, according to the Campaign for Tobacco-Free Kids. Washington state, which levies a tax of $2.03 a pack, loses an estimated $200 million a year to out-of-state purchases, according to the Seattle Times. Californians smoke 300 million untaxed packs of cigarettes a year thanks to the Internet, smuggling, and out of state sales.

In New York City, where the combined city and state tax is $3 a pack, smugglers sell bootlegged cigarettes on street corners much like drug dealers. Three weeks ago a sting operation in Queens busted a black market tobacco ring of “unbelievable proportions,” in the words of one official. The sting found a half-million untaxed cartons of cigarettes that were being sold out of car trunks to avoid the tax hit. The Tax Foundation estimates that half the cigarettes smoked in the Big Apple come from such illicit operations.

Patrick Fleenor of the Tax Foundation says states that tax cigarettes at more than $2 a pack “are getting close to that tipping point” where they may start to lose money from further tax increases. This is a special problem for those states — such as California, Maryland and Wisconsin — planning to raise cigarette taxes to pay for expanded government health-care coverage. The new spending commitments will be permanent and rapidly expand, while the revenues from tobacco taxes will decline.

State cigarette tax collections may fall by an estimated $1 billion more if Congress goes ahead with its plan to raise the federal cigarette tax to $1 a pack from 39 cents in the name of funding an expansion in health-care spending of $132.6 billion. The Heritage Foundation calculates that, to make those numbers add up, some 22 million Americans would have to start smoking over the next decade.

Read the editorial here. For more on cigarette taxes, click here.

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