The Effect of the Federal Cigarette Tax Increase on State Revenue

Download Fiscal Fact No. 166

Fiscal Fact No. 166

Today the federal 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. will rise from 39 cents to $1.01 per pack. The proceeds will help fund expansion of the federal State Children’s Health Insurance program. This program provides federal matching funds to states to assist them in providing health insurance to families and children. The SCHIP program is targeted at families with modest incomes above Medicaid eligibility limits.

Of course what the federal government gives with one hand it takes with the other. A $6.3 billion increase in the federal cigarette excise will reduce the disposable incomes of residents in the states. Table 1 shows that this reduction ranges from $581 million in California to $10.8 million in the District of Columbia.

Table 1 Increased Federal Tobacco Excise Payments by State, Resulting from the 62-cent Federal Cigarette Tax Hike Calendar Year 2010 Total $ 6,340,750,000 Alabama $ 109,978,857 Alaska $ 15,600,214 Arizona $ 134,852,031 Arkansas $ 67,864,689 California $ 581,127,778 Colorado $ 104,058,146 Connecticut $ 58,536,581 Delaware $ 17,692,891 Florida $ 379,981,723 Georgia $ 201,691,767 Hawaii $ 21,828,374 Idaho $ 30,543,511 Illinois $ 279,479,473 Indiana $ 163,995,056 Iowa $ 62,604,547 Kansas $ 53,229,601 Kentucky $ 128,026,882 Louisiana $ 107,844,936 Maine $ 28,467,786 Maryland $ 104,345,971 Massachusetts $ 116,613,891 Michigan $ 231,677,653 Minnesota $ 94,399,505 Mississippi $ 76,066,634 Missouri $ 154,309,350 Montana $ 19,280,691 Nebraska $ 37,285,410 Nevada $ 63,143,599 New Hampshire $ 28,470,956 New Jersey $ 163,676,384 New Mexico $ 42,409,119 New York $ 395,510,605 North Carolina $ 224,489,092 North Dakota $ 13,404,840 Ohio $ 281,256,032 Oklahoma $ 98,940,497 Oregon $ 67,665,226 Pennsylvania $ 271,838,059 Rhode Island $ 20,142,604 South Carolina $ 103,204,568 South Dakota $ 16,431,769 Tennessee $ 160,546,327 Texas $ 501,970,744 Utah $ 32,463,700 Vermont $ 11,923,948 Virginia $ 155,510,031 Washington $ 116,875,664 West Virginia $ 49,692,858 Wisconsin $ 117,357,576 Wyoming $ 11,645,403 District of Columbia $ 10,796,448

In addition to affecting residents’ pocketbooks, a hike in the federal tax would also depress state and local government revenues. To varying degrees state and local governments rely on the sale of cigarettes for three sources of revenue.1 The first is 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. revenue, or product-specific taxes levied on cigarettes. Under current law, cigarette excise taxes range from 7 cents per pack in South Carolina to $2.75 in New York. States also receive revenue from the Master Settlement Agreement (MSA) they signed with the four major tobacco companies in 1998. The amount of money each state receives varies and is a function of the number of packs sold in the state each year. In addition, almost all states levy a general sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. on cigarettes.

Congressional authorities estimate that the sale of tax-paid cigarettes will drop by about 10 percent—or 1.7 billion packs—in the aftermath of the federal tax hike. Table 2 shows that Tax Foundation analysts estimates that this will reduce state and local revenues by $2.3 billion in fiscal 2010, the first year the tax is fully in effect. The bulk of these losses will result from $1.6 billion in lost excise tax revenue. MSA payments are also expected to fall by $805.8 million. On the positive side of the ledger, because the federal tax will drive up the cost of cigarettes, sales tax receipts are expected to rise by $105.8 million.

Table 2 Revenue Lost by State and Local Governments, Resulting from 62-cent Federal Cigarette Tax Hike State Fiscal Year 2010 (July 1, 2009 – June 30, 2010) Dollar Amounts in Thousands
State	Taxed Sales (thousands of packs)	Total Revenue	Excise Revenue	MSA*	Sales Tax Revenue
Total	-1,655,638	-$ 2,296,311	-$ 1,596,304	-$ 805,789	$ 105,783
Alabama	-39,680	-$ 30,678	-$ 19,461	-$ 13,669	$ 2,452
Alaska	-2,250	-$ 7,638	-$ 6,034	-$ 1,605	$ 0
Arizona	-17,266	-$ 41,710	-$ 34,531	-$ 8,530	$ 1,351
Arkansas	-19,067	-$ 26,293	-$ 21,927	-$ 5,754	$ 1,387
California	-110,474	-$ 183,570	-$ 96,112	-$ 96,810	$ 9,353
Colorado	-23,309	-$ 28,664	-$ 19,580	-$ 9,879	$ 794
Connecticut	-13,400	-$ 36,808	-$ 26,799	-$ 11,186	$ 1,177
Delaware	-11,362	-$ 15,531	-$ 13,066	-$ 2,465	$ 0
Florida	-136,680	-$ 92,651	-$ 46,334	-$ 54,787	$ 8,470
Georgia	-66,117	-$ 42,400	-$ 24,463	-$ 21,634	$ 3,698
Hawaii	-3,654	-$ 10,592	-$ 7,856	-$ 2,986	$ 250
Idaho	-9,027	-$ 7,795	-$ 5,146	-$ 3,229	$ 580
Illinois	-50,890	-$ 90,731	-$ 66,547	-$ 28,636	$ 4,452
Indiana	-53,342	-$ 63,425	-$ 53,075	-$ 14,611	$ 4,260
Iowa	-16,366	-$ 25,700	-$ 22,258	-$ 4,661	$ 1,219
Kansas	-14,538	-$ 17,102	-$ 11,485	-$ 6,501	$ 884
Kentucky	-61,742	-$ 45,951	-$ 37,045	-$ 12,834	$ 3,928
Louisiana	-42,665	-$ 34,184	-$ 15,360	-$ 20,564	$ 1,739
Maine	-5,657	-$ 14,765	-$ 11,314	-$ 3,879	$ 428
Maryland	-20,713	-$ 53,885	-$ 41,427	-$ 14,058	$ 1,599
Massachusetts	-17,243	-$ 62,200	-$ 43,281	-$ 20,358	$ 1,439
Michigan	-43,066	-$ 107,270	-$ 86,132	-$ 24,897	$ 3,759
Minnesota	-23,072	-$ 48,813	-$ 34,447	-$ 16,336	$ 1,969
Mississippi	-29,628	-$ 20,732	-$ 5,333	-$ 17,518	$ 2,118
Missouri	-70,488	-$ 32,539	-$ 14,249	-$ 21,739	$ 3,449
Montana	-4,315	-$ 9,991	-$ 7,336	-$ 2,655	$ 0
Nebraska	-12,596	-$ 13,081	-$ 8,061	-$ 5,742	$ 722
Nevada	-16,912	-$ 17,526	-$ 13,529	-$ 5,212	$ 1,215
New Hampshire	-13,772	-$ 22,403	-$ 18,317	-$ 4,086	$ 0
New Jersey	-21,428	-$ 72,492	-$ 55,177	-$ 19,790	$ 2,475
New Mexico	-7,125	-$ 11,232	-$ 6,484	-$ 5,144	$ 395
New York	-34,763	-$ 163,418	-$ 108,729	-$ 57,189	$ 2,500
North Carolina	-80,618	-$ 43,998	-$ 28,216	-$ 19,274	$ 3,493
North Dakota	-5,490	-$ 5,922	-$ 2,416	-$ 3,780	$ 273
Ohio	-72,152	-$ 119,460	-$ 92,515	-$ 31,754	$ 4,808
Oklahoma	-32,865	-$ 42,076	-$ 33,851	-$ 8,225	$ 0
Oregon	-18,971	-$ 31,465	-$ 22,386	-$ 9,079	$ 0
Pennsylvania	-75,206	-$ 140,031	-$ 101,528	-$ 43,921	$ 5,418
Rhode Island	-3,495	-$ 11,851	-$ 8,597	-$ 3,638	$ 384
South Carolina	-48,964	-$ 12,660	-$ 3,428	-$ 11,944	$ 2,712
South Dakota	-3,969	-$ 8,005	-$ 6,073	-$ 2,120	$ 188
Tennessee	-47,788	-$ 42,706	-$ 29,631	-$ 16,561	$ 3,486
Texas	-97,905	-$ 182,283	-$ 138,046	-$ 51,856	$ 7,619
Utah	-8,914	-$ 9,681	-$ 6,195	-$ 3,935	$ 449
Vermont	-2,569	-$ 7,000	-$ 5,112	-$ 2,110	$ 221
Virginia	-64,835	-$ 40,369	-$ 26,837	-$ 16,812	$ 3,280
Washington	-16,340	-$ 43,643	-$ 33,088	-$ 12,148	$ 1,593
West Virginia	-23,637	-$ 20,478	-$ 13,000	-$ 8,898	$ 1,420
Wisconsin	-33,121	-$ 70,919	-$ 58,623	-$ 14,348	$ 2,052
Wyoming	-4,654	-$ 5,541	-$ 2,792	-$ 2,942	$ 193
District of Columbia	-1,539	-$ 6,450	-$ 3,077	-$ 3,503	$ 131
*Master Settlement Agreement signed in 1998 between the governments of 46 states and the four largest tobacco firms.

Losses are expected to vary widely by state. California, Texas and New York are expected to each lose more than $150 million in revenue next fiscal year. Meanwhile, losses in Wyoming, North Dakota and the District of Columbia are expected to be less than $6.5 million.

Notes

1. This list is not exhaustive. A hike in the federal cigarette tax will also reduce state income, property and other tax receipts.

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