Federal Tobacco Tax Revenues are Declining

In February 2009, the President signed into law a bill that included a large increase in federal excise taxes on tobacco. The biggest change in excise taxes was the more-than-doubling of the tax on cigarettes, from $0.39 per pack to $1.01 per pack. The tax increase was designed to help pay for the cost of children's health insurance under the State Children's Health Insurance Program (SCHIP.)

Initially, revenues more than doubled from $7.6 billion in 2008 to $17.1 billion in 2010, once the law fully took effect. However, since 2010, revenues have declined. The Congressional Budget Office projects that decline in revenues to continue.

This is not a surprise; it is a real life illustration of one of the best-known aphorisms of tax policy: if you tax something, you get less of it. For that reason, cigarette taxes aren't a particularly good way to fund programs like SCHIP. The needs of children remain even as revenue from tobacco taxes declines.