Christian Schneider

Author, Columnist

Cigarette Taxes Up, Revenue Down

The State Policy Network Blog points out the unintended effect of New Jersey\’s newly increased cigarette tax – it actually reduces revenue to the state.  SPN points to an Asbury Park Press column by Gregg Edwards, which says:

To support the Fiscal Year 2007 state budget, Gov. Corzine successfully proposed increasing the cigarette tax by 17.5 cents, from $2.40 to 2.575 per pack. It was the fourth tax increase in a six-year period and it made New Jersey\’s tax the highest state tax in the nation.

Here was the result: In FY 2006, the cigarette tax raised more than $787 million. In FY 2007 – after it was hiked by almost 7 percent – the tax raised only $764 million, or $23 million less than the previous year.

[…]

Some of the sales decline was due to smokers giving up an expensive habit, but that can\’t explain its magnitude. Many smokers don\’t buy cigarettes from New Jersey retailers. Instead, some purchase cigarettes in the states that border New Jersey, all of which have lower cigarette prices. While New Jersey\’s sales are plummeting, Delaware\’s are increasing. And it\’s certainly not the case that more Delaware residents are becoming smokers. Also, some smokers make purchases via the Internet. Others even buy in the black market, which owes its very existence to New Jersey\’s steep tax.

So higher taxes means less revenue to the state – and while some of the reduction can be attributed to people quitting smoking, much of it likely means people are getting their cigarettes from other sources.  In fact, recent research suggests that higher cigarette taxes don\’t, in fact, dissuade low-income smokers from quitting.

Of course, Governor Doyle\’s proposed per-pack cigarette tax increase of $1.25 far exceeds the new 17.5 cent tax in New Jersey.  So it will take a lot more people quitting or purchasing their cigarettes from out of state or online to offset the tax increase.  However, this effect supports Deb Jordahl\’s WPRI Commentary from last week, which demonstrates the paradox of state government relying on a new tax that is intended to keep people from a behavior that is needed to keep collecting the tax.

6 Comments

  1. Oh give me a break. For all of the supposed “losses” in tax revenue there will be multiples gained in health care savings! Why should we continue killing people so we can keep tax revenues up? And the higher the price of cigarettes the fewer new children smokers!

    Oh, I get it. But look at all of the tobacco industry employees we’ll put out of work!

  2. In response to all the money that will be saved in health costs…WHAT? Don’t you get the entire point of the story, which is that people are not stopping smoking, they are simply getting the cigarettes illegally and avoiding the tax. If you really want the cost increases to stop smoking, then you need to address teh illegal supply chains (internet, black-market, lower tax states, etc.).

  3. You will never eliminate the outside supply chains, but that is no reason to trash the rest of the prevention efforts. Otherwise you might just as well say zero taxes on everything, ’cause, what the hell, we don’t want people to circumvent normal buying channels.

    Besides, I am generally turned off by organizations like this that fight high taxes and then turn around and try to block the one thing that would curb high taxes in the first place, that being our corrupt political system.

    For $5 per taxpayer per year we could have 100% public funding of our elections, which would eliminate the $1300 per taxpayer per year that politicians give away to their fat cat friends through government subsidies and giveaways. But this group (and others) let ideology stand in the way of their math skills.

    Or, they are also funded by the fat cats, like the Club for Growth and Philip Morris, which are well known to fund grasstop organizations.

  4. You may never totally eliminate the outside supply chains, but the government must do something to try and limit their use. If people circumvent the “normal” chains of supply, they are not only evading the cigarette taxes but sales taxes also. The in-state businesses are paying cigarettes tax, sales tax, property tax, income tax, etc. and should not be ignored as part of the econonmy.

    We do live in America, which is a free country last time I checked, and small businesses selling legal products, yes even cigarettes, are large contributors to our government cofers and society. If you truly are concerned about public health maybe you should look at alcohol sales and calculate the health costs and negatives on society from this legal product.

  5. Cigarettes are legal only by historical accident. And a lot of campaign cash. They shouldn’t be made illegal but smoking should be probibited in public places. Increasing the taxes is the right thing to do, but we obviously disagree.

    And yes, we do live in a free country. We are free to bribe our state and federal politicians through our privatized electoral system. Not much different than Mexico, so watch our trend.

  6. We do live in America, which is a free country last time I checked, and small businesses selling legal products, yes even cigarettes, are large contributors to our government cofers and society. If you truly are concerned about public health maybe you should look at alcohol sales and calculate the health costs and negatives on society from this legal product.

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