New ideas to better the Old Line State
Pricier Cigarettes are No Budget Panacea
By J. Scott Moody and Wendy P. Warcholik, Ph.D.
Published on Friday, November 16, 2007
MARYLAND POLICY REPORT
Governor O'Malley plans to close the $1.7 billion budget deficit with a dramatic $1.00 increase in the cigarette tax to $2.00 per pack from $1.00 per pack-a 100 percent increase. This proposed tax hike comes on the heels of an 83 percent increase in FY 2000 (to $0.66 from $0.36) and a 52 percent increase in FY 2002 (to $1.00 from $0.66). The Governor estimates that overall, this panacea would generate $166 million in new revenue in FY 2009 (the first full FY under the new tax increase).
This revenue estimate does not account for cross-border cigarette shopping, or smuggling, undermining any revenue gain. Cross-border shopping for cigarettes is a nationwide phenomenon and is particularly common where cigarette prices vary widely between states.[1] Differences in the tax rates between states encourage people to buy cigarettes over state lines.
If the General Assembly votes to enact the Governor's cigarette tax increase, Maryland will have the highest tax rate among all the bordering states-Delaware ($0.55), Pennsylvania ($1.35), Virginia ($0.30) and West Virginia ($0.55). As a result, Maryland smokers will have their choice of travel destinations where they can purchase their cigarettes at a lower price than in their home state. Due to Maryland's geographical proximity to these states, this proposed policy could have devastating effects, particularly when shoppers travel to Virginia to benefit from the largest tax rate differential of all the adjacent states.
[1] Fleenor, Patrick, "How Excise Tax Differentials Affect Interstate Smuggling and Cross-Border Sales of Cigarettes in the United States," The Tax Foundation, Background Paper No. 26, October 1, 1998. www.taxfoundation.org/publications/show/127.html
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