January 8th, 2021
Cigarette Tax Hikes Usually Backfire
Raising cigarette taxes in most instances have backfired on states hoping to get a windfall on the higher taxes. Unintended consequences are the rule, not the exception.
States raising cigarette taxes usually find that consumers alter their purchasing patterns. They start getting their cigarettes from sources with lower or no taxes. These sources may be nearby states with lower tax rates, the Internet, or Native American territories. The result is that the tax-raising state loses its expected revenue. Furthermore, local retailers are harmed, especially in minority neighborhoods.
When Maryland implemented a $1.00 per-pack cigarette excise tax increase in 2008, law enforcement seized four times as many out-of-state cigarette packs as compared to the same time period the prior year.
Texas also found that raising cigarette taxes was no magic potion. When it raised its excise tax on cigarettes $1.00 in 2007, Internet cigarette purchases by Texas residents increased from 2 percent of total national online sales to 17 percent.
Raising regressive taxes such as cigarette taxes harm the local economy, put an added burden on the poor, especially minorities, and drive local shops out of business. Rather than raising taxes, states must realize that the only realistic way to fight budget deficits is to cut spending.