The Tobacco Tax Trap

You may think smoking is bad, you may not smoke yourself, but is taxing tobacco to the max in Illinois--to the tune of almost $10 a pack in Chicago-- good public policy? Consider that this is a regressive tax, which hits the poor the hardest:

Though higher costs might drive some to quit or at least scale back their smoking, the reality, smokers said, is that if it were easy to quit many would have done so already.

"I think smokers are more likely to cut back on other things they buy than cigarettes," said Cathy Bay, who stocked up on cartons at the Tobacco House near her home in Tinley Park. "It's too tough. For older people who've been smoking most of their lives and now they have to deal with this, it's a difficult situation."

And as we've seen with bottled water and gasoline, some Illinois consumers go out of town or out of state to find a better deal--which raises the question--- can we afford to rely on such an iffy tax revenue stream? It's the tobacco tax trap. Reason:

In 2006, New Jersey raised its already high cigarette tax, thinking it would bring in an extra $30 million a year. It didn't. Worse, it caused their actual collections to drop by more than $20 million. The tax increase threw the state's budget off by $50 million, money that had to be made up by other taxpayers. This isn't unique to the Garden State. Since 2003, there have been 57 cigarette tax increases across the country. In 37 (68 percent) of those cases revenues failed to meet projections.

In fact, it looks like they'd get more revenue by cutting taxes. Now there's a thought.

Aside from Illinois, the federal SCHIP tax on smokers takes effect today, supposedly to pay for a major new health care program, with the same dubious results. WSJ:

The number of smokers keeps falling, but health-care costs keep rising. So paying for the biggest new health-care expansion in years with a declining revenue source is a guarantee of future red ink that will increase pressure for higher income taxes too. Just ask the politicians in Maryland, who doubled their cigarette tax two years ago to finance a new health-care program. That has led to 25% less tobacco revenue than expected because of declining sales, so the program is already in the red after its first year. But hey, it's the thought that counts.

Let's avoid this tobacco tax trap--we're already in the red enough in Illinois--start by cutting spending some more, Governor Quinn.

P.S. I see Marathon Pundit is posting on this as well.

More: AP zings our President Barack Obama for breaking his campaign tax pledge: Promises, Promises: Obama tax pledge up in smoke: 

The largest increase in tobacco taxes took effect despite Obama's promise not to raise taxes of any kind on families earning under $250,000 or individuals under $200,000.

This is one tax that disproportionately affects the poor, who are more likely to smoke than the rich.

To be sure, Obama's tax promises in last year's campaign were most often made in the context of income taxes. Not always.
"I can make a firm pledge," he said in Dover, N.H., on Sept. 12. "Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes."

He repeatedly vowed "you will not see any of your taxes increase one single dime."