As Coal Revenues Decline, West Virginia Turns to Cigarette Taxes
June 14, 2016
West Virginia’s coal industry is shrinking, creating a budget gap. Policymakers are taking steps to reduce the state’s heavy reliance on coal severance taxes; unfortunately, raising the cigarette tax is a bad way to do it.
West Virginia’s current 5 percent severance tax was responsible for 13 percent of total tax revenues in 2014. Revenues dropped sharply in 2015, with third-quarter severance tax revenues hitting their lowest point since 2008.
Declining revenues led to a $270 million budget deficit for the upcoming fiscal year, for which lawmakers have crafted a budget containing a combination of spending cuts, rainy day fund contributions, and a 65-cent cigarette tax increase.
The cigarette tax increase would more than double the current rate of 55 cents per pack, which is the 5th lowest in the nation. The new rate of $1.20 cents per pack would jump West Virginia 14 places to the 32nd highest cigarette tax in the nation.
Depending on smokers to generate the funds is not a long-term solution, as cigarette consumption has been in steady decline since the 1960s, making it an unstable source of revenue. Higher cigarette taxes also increases the likelihood of cigarette smuggling, which can lead to violent crime, theft of tobacco and tobacco tax stamps, and in at least one awful case, the corruption of law-enforcement officers.
Despite these concerns, multiple states have raised cigarette taxes in recent years. Illinois raised its cigarette tax in 2012 and ended up short of the first year’s revenue projections, collecting only 60 percent of what was expected. Similar revenue shortfalls have resulted after cigarette tax increases in New Jersey, Washington, D.C., and other states.
The budget gap is closed for now, but West Virginia’s economy is still struggling, mainly attributable to the slowing coal industry. More broad-based tax reform will be necessary in West Virginia in future sessions, as policymakers consider ways to rebalance the state’s spending and revenue.