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Cigarette tax increase plan is flawed

Originally published in the Baltimore Examiner

By Marc Kilmer
Published on Thursday, October 04, 2007
OP-EDS

BALTIMORE - As part of his effort to close Maryland’s structural deficit, Gov. Martin O’Malley has set his sights on a favored taxman target: Cigarette smokers. The governor has floated the idea of doubling Maryland’s $1-a-pack tax on cigarettes, rekindling a proposal that died in the state Senate last spring. This raises a question: Why should cigarette smokers have to pay off so much of the state’s budget deficit? Moreover, is increasing Maryland’s fiscal dependence on the cigarette tax such a good idea?

Anti-smoking advocates often claim that high cigarette taxes are justified because smoking imposes huge costs on society. Though it is true that smoking does impose some social costs, academic studies show those costs are dwarfed by the taxes already assessed on cigarettes. Cigarette users cost society around 32 cents a pack. The additional 68 cents that Maryland collects on each pack of cigarettes, plus any additional tax that Gov. O’Malley may implement, does not compensate for smokers’ cost; it is merely a subsidy going from smokers to everyone else in Maryland.

It’s highly questionable whether smokers, as a group, should be made to pay this subsidy. Smokers are disproportionately lower-income, and raising the cigarette tax takes more money out of the pockets of the poor than any other tax. It thus seems odd that Gov. O’Malley would want to increase this tax on the poor when he has repeatedly criticized Maryland’s tax structure for not being sufficiently progressive.

The rationale to levy this tax on the poor is to raise revenue to close the state’s structural deficit as well as to pay for an expansion of some state programs. But cigarette taxes have proven to be an unreliable source of income. Tobacco tax revenue declines from year to year. The tax increase proposal that Annapolis considered last spring conceded that revenue from the tax would decline by more than 25 percent in the second year of the tax.

And that revenue estimate may be optimistic. Cigarette tax revenue is notoriously hard to project. When New Jersey raised its tax, for instance, the actual revenue was 67 percent less than estimated. This is probably because cigarette consumers shift their cigarette purchases to other states in response to the tax. A state like Maryland is very susceptible to this practice. Many Marylanders live near or work in other states that have lower cigarette taxes — Delaware assesses $1.15 per pack, West Virginia assess 55 cents per pack, and Virginia assesses between 30 and 55 cents per pack (depending on the county). If Maryland were to adopt Gov. O’Malley’s suggestion and assess a $2 a pack tax, the state would also have a significantly higher tax than Pennsylvania ($1.35) and the District of Columbia ($1). What public benefit would be served by Maryland cigarette smokers increasingly paying their tobacco tax to other states?

This type of tax avoidance is prevalent in states that have enacted high cigarette taxes. Officials in Washington State, for instance, estimate that up to 25 percent of the cigarettes smoked in that state were purchased in a way to avoid the state’s high cigarette tax.

If Gov. O’Malley and the majority of Marylanders agree that all state spending is so vital and efficient that the structural deficit should not be closed by budget cuts, then Marylanders should agree to pay the taxes necessary to close that deficit. They should not try to foist an unfair share of that tax burden on smokers. After all, given the increasing level of cigarette tax avoidance, it’s likely that all state taxpayers will ultimately pay the cost, anyway.

Marc Kilmer is a senior fellow at the Maryland Public Policy Institute, a public policy think tank based in Rockville.

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