Cigarette Tax Burnout


Author: The Wall Street Journal

Source: 11/08/2008

Politicians in Annapolis are scratching their heads wondering what happened to all those chain smokers who were supposed to help balance Maryland´s budget. Last year the legislature doubled the cigarette tax to $ 2 a pack to pay for expanded health-care coverage. Eight months later, cigarette sales have plunged 25% and the state is in fiscal distress again.

A few pols are pretending to be happy that 30 million fewer cigarette packs have been bought in the state so far this year. As House Majority Leader Kumar Barve put it, fewer people smoking is “a good thing.” Yes, except that Maryland may be losing retail sales more than smokers. Residents of Maryland´s Washington suburbs can shop in nearby Virginia, where the tax is only 30 cents a pack, and save at least $ 15 per carton.

The Maryland pols are so afraid this is true that they've made it a crime for residents to carry two packs of cigarettes that weren't purchased in the state. In other words, the state says it's legal to smoke, so long as you use cigarettes that the government can tax and thus become a financial partner in your bad habit. But if you dare to buy smokes across state lines, you can be fined.

Maryland is only the latest state to prove the folly of trying to finance government with a tax on a shrinking pool of smokers. In New York City and State, tobacco taxes have been raised so many times that the retail cost can exceed $ 9 a pack - about double the national average. Few budget-savvy smokers in the Big Apple pay that tax. Patrick Fleenor, an expert on tobacco taxes at the Tax Foundation, estimates that there is “now a 75% gap between cigarette sales in the city and cigarette consumption.” In other words, three out of four cigarettes are bought elsewhere or are contraband. Out-of-state purchases, tax-free Internet sales and a cigarette black market are booming.

In New Jersey, about 40% of the Marlboros and Virginia Slims that are lit up escape the $ 2.57-a-pack tax. In Washington State, evasion was so rampant that the legislature decided in 2005 to lower the 75% tax on cigars and other tobacco products as a way to raise revenue and help state retailers.

Members of Congress, please take note. Democrats are planning one more pre-election go at a $ 35 billion children´s health program expansion (S-chip) funded by a 61-cent per pack tobacco tax increase. They justify the new levy as a “sin tax.” OK, but if Americans don´t start sinning a whole lot more, states and Uncle Sam are going to go broke.