Budget & Tax
Jonathan Small | February 17, 2015
Cigarette and tobacco tax hikes a bad and dangerous idea
Across the country, state legislative sessions have begun and numerous ideas are being considered. Over the years, a number of states have increased taxes on cigarettes and tobacco products to increase funding for numerous government programs, including education. Historically, with the exception of health care programs, Oklahoma for the most part has avoided the pitfalls of tying core functions of government to cigarette and tobacco tax revenues. But some are suggesting that Oklahoma now join the ranks of other states who have unwisely adopted cigarette and tobacco tax increases to fund education.
Below are just a few examples of why any tax hike on cigarette and tobacco products is unwise.
- “Sin tax” hikes guarantee future revenue failure. Cigarette and tobacco tax hikes are a form of “sin taxes.” Sin taxes are special excise taxes charged by government on activities that government either wants to eliminate or wants to strongly discourage. So these taxes are the worst revenue sources for programs that government intends to continue in perpetuity. Several state agencies are aggressively working to get Oklahomans to cease using cigarettes and even any sort of tobacco product, regardless of risk. Economics 101 tells us that if you tax more of something, especially at significantly high amounts, you will get less of it. So it would be foolish to try to fund a core service like education with revenue derived from an activity that government is actively working to end.
- Cigarette and tobacco tax hikes increase “black market” smuggling and criminal activities. The recent death of Eric Garner during his arrest for selling “loose” cigarettes in New York is a prime example of the danger to people when government targets certain products under the guise of health but really for the sake of revenue gains for government. Oklahoma already has experience with expansion of the “black market” for cigarette and tobacco products after tax hikes. Following cigarette and tobacco tax hikes and tobacco compacts, significant numbers of Oklahomans began to seek purchases on tribal lands and elsewhere to avoid the tax. The Tax Foundation has noted that increases in smuggling of cigarettes directly correlate to tax hikes, thus resulting in decreased revenue for government and increased criminal activity. Cigarette and tobacco tax hike proposals under consideration in Oklahoma would increase the tax by $1 per pack, almost a 100 percent increase, and would make the state ripe for a significant increase in smuggling of cigarettes into Oklahoma. Currently, Oklahoma ranks 31st among the states and the District of Columbia, and 4th when compared to surrounding states, for the state tax on a pack of cigarettes, $1.03. If this tax were increased by $1, Oklahoma would catapult to 11th among the states and the District of Columbia and number one by at least $0.37 a pack compared to surrounding states. History suggests this would significantly increase the smuggling of lower-taxed cigarettes into Oklahoma, and could cause funding to decline for existing programs like Medicaid and other health care programs that are currently funded by cigarette and tobacco tax revenues. Also, given Oklahoma’s current prison overcrowding problem, enacting policies that will drive up criminal activity for nonviolent offenses and prosecution of those offenders is dangerous and unwise.
- Oklahoma is already addicted to cigarette and tobacco tax revenues. Since FY-2003, the state of Oklahoma has collected more than $2.4 billion in cigarette, tobacco, and compact taxes. These taxes generated $291 million in FY-2013. Cigarette taxes alone in FY-2013 totaled $210 million. The Tobacco Settlement Endowment Trust received $85 million in payouts from the tobacco industry alone in FY-2013, and by the time the payments are complete, expects to receive over $2 billion in payments. Given the inherent flaws of such a revenue source, further entrenching the state’s reliance on such a volatile source of revenue is unwise and a danger to core government services.
- Indiscriminate tax hikes on tobacco products ignore the varied risks of differing tobacco products. Current cigarette and tobacco product tax hikes under consideration in Oklahoma also seek to increase the burden of the taxes equally, even though the risks of smoking far exceed the risks of other forms of tobacco use. Treating these products equally is actual a danger to Oklahomans trying to shift to less risky products and is not a good policy for Oklahomans.
- Oklahomans cannot afford to have more of their hard-earned money taken. Oklahomans already pay a significant portion in taxes. The Tax Foundation notes that “Tax Freedom Day” (the day when Americans finally have earned enough money to pay off their total tax bill for the year) didn’t arrive for the average Oklahoman until April 11th last year. Oklahomans already were forced to pay a myriad of taxes, totaling thousands of dollars per year, instead of meeting educational, health care, housing, clothing, transportation, dependent care, elderly care and other family and community needs. Taking more of their money because government has established one ill over another is discriminatory and bad for the economy. Oklahoma is currently trying to meet the needs of diversifying its economy, especially in a period of lower energy prices. Extracting more funds from Oklahomans is precisely the wrong thing to do when trying to help the economy grow and diversify.
People will have varied opinions on the need for common education to have revenue increases. One thing is certain. Oklahoma policymakers should oppose any sort of tax hike on cigarettes, tobacco, or other related products. Such tax hikes are bad policy, unstable, and bad for the program they are intended to help.
Jonathan Small, C.P.A., serves as President and joined the staff in December of 2010. Previously, Jonathan served as a budget analyst for the Oklahoma Office of State Finance, as a fiscal policy analyst and research analyst for the Oklahoma House of Representatives, and as director of government affairs for the Oklahoma Insurance Department. Small’s work includes co-authoring “Economics 101” with Dr. Arthur Laffer and Dr. Wayne Winegarden, and his policy expertise has been referenced by The Oklahoman, the Tulsa World, National Review, the L.A. Times, The Hill, the Wall Street Journal and the Huffington Post. His weekly column “Free Market Friday” is published by the Journal Record and syndicated in 27 markets. A recipient of the American Legislative Exchange Council’s prestigious Private Sector Member of the Year award, Small is nationally recognized for his work to promote free markets, limited government and innovative public policy reforms. Jonathan holds a B.A. in Accounting from the University of Central Oklahoma and is a Certified Public Accountant.