D.C. Faces Lower than Expected Cigarette Tax Revenue After Tax Increase

Dan Mitchell at the Cato Institute finds an interesting revelation in the report of the Chief Financial Officer of the District of Columbia (PDF):

One of the gap-closing measures for the FY 2010 budget was an increase in the excise tax on cigarettes from $2.00 to $2.50 per pack. The 50 cent increase in the cigarette tax rate was projected to increase revenue but also reduce volume. Collections year-to-date point to a more severe drop in volumes than projected. Anecdotal evidence suggests that Maryland smokers who were purchasing in DC in FY 2008, because the tax rate in the District was less than the tax rate in Maryland, have shifted purchases back to Maryland now that the tax rate in the District is higher. Virginia analyzed the impact of demand when the federal rate went up by $0.61 in April and has been surprised that demand is much stronger than they had projected-raising the possibility that purchasing in DC has moved across the river. Whatever the actual cause, because of the lower than anticipated collections, the estimate for cigarette tax revenue is revised downwards by $15.4 million in FY 2010 and $15.2 million in FY 2011. Given that cigarette tax rates in neighboring jurisdictions are now lower than that of the District, future increases in the tax rate will likely generate less revenue rather than more.

(Emphasis added.) Mitchell adds:

As the excerpt…illustrates, an increase in the cigarette tax did not raise the amount of revenue that local politicians expected. The evidence is so strong that the city’s budget experts warn that a further increase will reduce revenue.

Stateline notes that cigarette tax increases are pending in Georgia, Kansas, South Carolina, and Utah.

More on cigarette taxes here.


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