Tax Addiction-States Becoming More Dependent on Tobacco Levies

By Cole Chapman and Brooke Singman

chart 2

Massachusetts lawmakers’ growing reliance on tobacco taxes to help balance the state budget is part of a national trend that has grown with each flutter of the country’s economy.

“To some extent you could say states became addicted to tobacco revenue,” said Scott Harshbarger, the former Massachusetts attorney general who helped negotiate the 1998 Tobacco Master Settlement Agreement that brings Massachusetts an average $250 million until 2025.

Cigarette tax revenues, along with the settlement money, brought in about $815 million last year, according to the Department of Revenue. That figure is expected to rise another estimated $165 million – for a total of $980 million – under the dollar-per-pack increase passed in this year’s legislative session.

All of the increase would go to fix the state’s aging transportation infrastructure. Nearly all the other tobacco tax revenue now goes into the general fund. Only $4.2 million went to anti-smoking programs this year.

Marc Hymovitz, director of advocacy and Massachusetts state government relations for the American Cancer Society, said the use of tobacco tax revenue to fund anti-smoking programs in earlier years was superseded by the state’s economic crises of the past decade.

“Unfortunately in 2002, when the economy tanked and the state needed revenue, they swept all of that money out of that fund and put it in the general fund to balance the budget,” he said.

Massachusetts has raised tobacco taxes in 1993, 1998, 2002 and 2008 – all periods of economic downturn. Forty-six other states have raised their levies on cigarettes 105 times since the 2002. New England states accounted for 22 of those increases.

Connecticut’s tax increased five times between 2002 and 2011, from $1.11 to $3.40 a pack. Vermont is considering its sixth tax increase since 2002 by adding another $1.50 per pack. New Hampshire alone bucked the trend, cutting its cigarette tax 10 cents a pack in 2011. A plan to raise the tax 20 cents passed the state’s House in March but was rejected by the Senate.

Scott Drenkard, an economist with the Tax Foundation’s Center for State Tax Policy, says tobacco taxes have become a go-to for states seeking additional revenues.

“People like roads and people don’t like smoking. It’s expedient to raise taxes on an unpopular group to raise revenue for something everybody likes. That doesn’t make it a good policy, but that’s the situation,” Drenkard said.

Michael Widmer, president of the Massachusetts Taxpayers Foundation, said the tax is a safe move for Massachusetts lawmakers.

“The increase in taxes raises a lot of money, doesn’t have a lot of political opposition, and it benefits the public health,” said Widmer. “There are very few taxes with those three forces working together.”

But some question whether that makes for good tax policy.

“You’ve got a situation where people that might use the roads less or not even at all are paying a disproportionate burden of that particular service,” said Drenkard.

Elizabeth Malm, another Tax Foundation economist, says there is a predictable obsolescence to tobacco taxes.

“They argue that if we increase the tax on cigarettes we’ll decrease consumption. And if that is the case, and it seems to me that that is happening, then that group of people will continue to get smaller and smaller and smaller and over time you’re not going to be able to extract revenue from that group,” she said.

Beyond the uncertainty of rising taxes and decreasing tobacco sales is the hard fact that come 2025 the state will lose the annual quarter billion dollar tobacco settlement payments it has come to depend on.

Widmer said government will have to find new revenue to recoup the loss. However, with nearly 12 more years left, it is hard to know what that will be.

“Time will tell,” he said.

Other News »