Cigarette tax hike now produces more harm than good

So there’s still a move afoot to raise Louisiana’s cigarette tax for next fiscal year, despite Gov. Bobby Jindal’s promise to veto it if it ever even reaches his desk. Naturally, government backers of this articulate the exact wrong reasons at the wrong time for doing so.

These elected officials offer three arguments for its palatability in a depressed economic environment. First, as always, is its status as a “sin” tax levied against those, comprising a substantial minority of the citizenry, who engage in a behavior considered noxious by many and presumably harmful to themselves, a consideration that attempts to provide a moral basis for higher and higher taxation on facilitation of this activity. Second, presenting a political justification, is that majorities of Louisianans actually favor some increase in the existing, relatively low, taxation rate, so the will of the people dictates an increase. Third, they argue the state leaves dollars on the table as surrounding states have higher taxes, somehow proving the market can bear higher taxes and thus by raising it no higher than the lowest surrounding state, thereby capture higher revenue from both in- and out-of-state consumers.

However, using these as a rationale on which to achieve higher general fund revenues based upon an increased cigarette tax invites fiscal irresponsibility. To understand why, let’s assume by the standard above an increase of 32 cents and utilize the same assumptions used in the last attempt to hike taxes, the 2009 fiscal note for HB 889 and apply the change proportionally – but acknowledging that because Mississippi raised its tax since and the change is lower than the then-proposed 50 cent jump up and only applies to cigarettes, it might be optimistic. Then it predicted almost $100 million a year for five years, so adjusted it might generate $54 million annually.

Still, this probably overstates, perhaps considerably, the case, not only for the above factors, but also because the boost would discourage cross-border shoppers and the ancillary activity they bring, such as buying other products. It also doesn’t factor in shift of sales to military posts (typically Army and Air Force) which can be as much as five percent below local prices, nor to Indian reservations which can undercut other sellers to any degree their retailers on tribal lands like. Finally, predictions of these revenue enhancements historically overestimate.

Taking all of that into consideration, this kind of alteration not only is no panacea for what ails revenue amounts, but likely would have a minimal impact on funding government. Indeed, the ripple effects from it – reduced sales in stores leading to lower sales tax collections and potential layoffs of employees – would reduce further any perceived fiscal advantages from revenue losses from other kinds of collections. This uncertain resource makes for unwise budgeting.

And none of this takes into account the inherently dishonest act of raising the tax or of the nature of the tax itself. Good public policy dictates goals of maximal transparency and clear accountability in funding a purpose of government. Therefore, in regulating a specific activity such as this, revenues raised from taxing that activity should reasonably relate to the costs to government of that activity. The present advocacy of the increase imports the same purpose to which the tax shovels current revenues – none, just use as general fund dollars for any purpose. This signals callousness and cynicism of the proposers, seeming interested only in revenues they can leech off of people’s self-destructive behavior.

For there to be any moral case for a tax increase of this kind – one with popular consent that minimizes economic harm and relates closely to an important government purpose – the tax would have to happen after the recession of the past couple of years definitively has ended with clear public support and would have to have its revenues dedicated to paying for public costs of the individual choice of smoking. This means a hike could not occur this year, public opinion in some form still would have to favor it at that future time, and the funds raised from it (indeed, all cigarette tax revenues) should be dedicated to something like funding Medicaid waiver slots for those suffering from breathing-related disabilities. Better still, it would allow for a tax cut elsewhere.

(Although if we assume the rise in tax levels discourages smoking, it might actually cost the state in indigent care more than it brings in, assuming those who make use of these additional Medicaid waiver slots do so because of disability they brought upon themselves by smoking. With others who might have avoided that by ceasing or never taking up smoking, no policy-maker dares mention the fact that for these quitters and non-starters over their lifetime the state’s health care costs will be higher than for the typical smoker’s, simply because they live longer.)

Interestingly, a kind of trial run of cigarette taxation policy may occur in next year's session. On Jun. 30, 2012, the 10-year additional 4 cents per pack  from Act 21 of 2002 expires, meaning with no legislative action by then,  cigarette taxes go down.

So while, as advocates of a cigarette tax boost plead, policy-makers should keep an open mind about this move as a public policy gesture neither the ideas behind its latest incarnation nor the timing justify its ratification. Come back with something different, in the future dedicating the revenue stream to a proper purpose and maybe tying it to reduced taxes elsewhere, and then maybe thinking people will see some merit to it.