Legislatures increase cigarette taxes periodically for a variety of reasons. Policymakers and public health advocates have long pushed them as a means to incentivize smokers to quit. More recently, though, a number of states have looked to them to bridge sizable budget gaps. When governors unveiled their budget proposals earlier this year, nine included proposals to raise taxes on tobacco.
One of those states was Louisiana, which used a 50-cent tax increase on cigarette packs to help close a $1.6 billion budget shortfall. Lawmakers also introduced new taxes on electronic and vapor-based tobacco products to help minimize Medicaid funding cuts. In Ohio, Gov. John Kasich initially proposed raising the state’s cigarette tax by $1 per pack before lawmakers approved a budget with a 35-cent increase. Nevada lawmakers passed a $1 per pack tax increase in Gov. Brian Sandoval’s $7.4 billion budget, helping pay for additional investments in education. Lawmakers in Connecticut, Rhode Island and Vermont OK’d smaller cigarette tax hikes as well.
Of course, raising cigarette taxes alone won’t balance a budget. But tinkering with these and other sin taxes on goods or services considered unhealthy tend to be more politically viable at a time when many state lawmakers vehemently oppose any efforts to increase taxes on income. Most states exploring the issue have among the lowest cigarette tax rates, making them prime targets for increases.
A growing number of states are also, like Louisiana, weighing taxes on electronic cigarettes and vapor products. But only a few states have passed laws dealing with them so far, with most proposals levying taxes at the wholesale level where they are easier to administer.
Some of the lowest cigarette tax rates are found, not surprisingly, in major tobacco-growing states. Georgia, Kentucky, North Carolina and Virginia all impose taxes of no more than 60 cents on cigarette packs, well below the national average of $1.58. In seven states, the rate exceeds $3 per pack.
State Cigarette Tax Rates Map
The extent to which states rely on cigarette taxes for revenue, while not significant, varies greatly. Cigarette taxes accounted for 9.4 percent of New Hampshire’s total tax receipts in fiscal year 2014, the most of any state. This is partly because New Hampshire lacks a broad-based sales or individual income tax, but also because the state benefits from cross-border purchases by smokers living in neighboring states with higher tax rates.
In the long term, cigarette taxes represent a less-than-ideal revenue source, because the money they bring in is gradually declining. An analysis by the Government Accountability Office estimated Americans consumed 299 billion cigarettes in 2010, down from 456 billion in 2000. “If you’re depending on cigarette revenue for education, you better be thinking about the years down the road,” says Norton Francis, a researcher with the Urban-Brookings Tax Policy Center.
They also don’t raise as much money as projected, even in the short run. The National Taxpayers Union Foundation reported that tobacco tax collections failed to meet initial revenue targets in 72 out of 101 recent tax increases.
States typically route most tobacco tax revenue to their general funds. A portion of the money does go to tobacco control programs aimed at smoking cessation and preventing kids from starting to smoke. However, as of 2011, only two states were funding tobacco control programs at levels recommended by the Centers for Disease Control and Prevention.
Another strike against cigarette taxes is that they’re regressive. Poorer taxpayers who smoke pay a higher share of their overall earnings in excise taxes, and they tend to smoke at higher rates than the rest of the population. The burden is particularly severe for those living in select areas where taxes are highest. Those smoking a pack a day in New York City pay $2,135 a year in state and local tobacco taxes, and that doesn’t even include federal taxes.
When it comes to encouraging smokers to break the habit, research shows large tax hikes have a much more noticeable effect, and it’s typically young and poorer smokers who are most likely to quit. Those who stop smoking, of course, could help states drive down health costs as well.
