Proposed Tobacco Tax Hike Deserves To Be Snuffed Out

By Benita M. Dodd

Georgia’s House lawmakers are about to consider the governor’s proposal to raise Georgia’s tobacco taxes, an action that some say “produces both needed revenues and public health benefits.”

“If we must raise a tax to meet our goals as a state, this is the one to raise,” the governor argues.

Research proves the tax hike is wrong on all counts. Aside from its patent unfairness, this targeted tax will produce neither the revenue nor the health benefits that the General Assembly is counting on. It doesn’t deserve the legislative stamp of approval.

Lawmakers need to insist on balancing state government’s budget the way reasonable Georgia taxpayers would theirs: by cutting back, streamlining operations and making do. And if the state’s general budget needs a cash infusion, it ought to come from Georgia taxpayers in general, not specifically from Georgia’s smokers or drinkers or motorists or boaters, and not disguised as in their own interest. A tax is a tax is a tax.

Instead, the proposal would raise the 13 percent cigar tax to 36 percent; create a 36 percent tax on smokeless tobacco, and increase the 12 cents excise tax on a pack of cigarettes to 58 cents a pack.

The state estimates that the tax increase would bring $348 million to Georgia’s coffers, helping bridge a projected budget deficit of $800 billion to $1 billion in fiscal 2004. The cigarette tax alone would account for $311 million, according to state figures.

Each tobacco tax increase is far and away bigger than in surrounding states. Georgia’s cigarette excise tax would be more than 41 cents higher than the average of its neighboring states. Georgia smokers won’t need to travel far to find better deals, from 5 cents in North Carolina to the region’s high of 33 cents in Florida. Travelers to Florida would stop in Tennessee, with its 20-cent tax, and skip Georgia.

“The state of Georgia can increase the price of cigarettes that are bought in the state of Georgia,” remarks Dwight Lee, professor of Economics and the Ramsey Chair of Private Enterprise at the University of Georgia, “but they’re going to have a hard time increasing the price of cigarettes that Georgians smoke. ”Georgians will merely turn to the Internet and nearby states for cheaper cigarettes, Lee warns.

“What that suggests is that they will raise some revenue — no doubt about it — but it will be less than they anticipate.”

Lee’s assertion is supported by the Beacon Hill Institute at Suffolk University in Boston, which has released a sophisticated analysis of the impact of the tobacco tax increase on Georgia.

Using a State Tax Analysis Modeling Program, which predicts scenarios based on the state’s tax and historical economic data, the institute found that if the legislation is approved, the state would net just $290.05 million in cigarette taxes in fiscal 2004, not nearly the $311 million the government is hoping for.

The institute’s analysis did not specifically take into account the business and taxes lost due to cross-border sales as consumers head for surrounding low-tax states.

The process of raising that $290 million to keep state government happy will cost nearly 4,000 regular Georgians their jobs — all because of a shortsighted campaign to penalize the pariahs, cigarette smokers, and claim it’s all for their own health.

Most job losses will come from the retail sector.

Tobacco products account for more than 40 percent of sales in the average convenience store, according to the National Association of Convenience Stores; convenience stores sell more than 60 percent of the cigarettes sold. In Georgia, 5,200 convenience stores employ 56,000 workers. Especially near state borders, their sodas, potato chips, Lottery tickets and gasoline will go unbought by those people who no longer stop for cigarettes.

“Making us uncompetitive through tax policy and causing business failures in companies that have invested in this state would be the real sin of these proposals,” Jim Tudor, president of the Georgia Association of Convenience Stores, told a House subcommittee.

Cross-border shopping for cigarettes and liquor is nothing new, but there are indications of a recent surge as states target smokers and alcohol drinkers, hoping for an easy fix for a budget crunch. However, the easy fix is deteriorating into a budget hit.

Economist Bill Orzechowski, whose Arlington, Va.-based consulting firm tracks tobacco sales, has seen the pattern. Of the 22 states that raised taxes last year, every one has seen tobacco sales drop. Of the six states and the District of Columbia that saw an increase in tobacco sales last year, all are neighbors of states with hefty price hikes.

Most notably, Orzechowski’s preliminary data show that after Maryland raised taxes 33 cents per pack last year, sales declined 11.6 percent. In the District of Columbia and Delaware, which had not raised taxes, tobacco sales soared 42 percent and 31 percent respectively.

Such figures also negate the public health argument: For the vast majority of consumers, states’ tobacco tax hikes have not been an incentive to quit smoking but a motivator to take their business elsewhere – and perhaps to find themselves criminalized for seeking a better deal on a legal product. For Georgians, transporting more than 200 cigarettes without invoices or delivery tickets is punishable. Federal authorities have seen cigarette smuggling increase dramatically in states with hefty tobacco taxes. For the states, it means more lost revenue.

A 1998 study in the Rand Journal of Economics (Evans, W.N., and Farrelly, M.C.) found that some smokers — particularly younger smokers — will compensate for higher cigarette taxes by smoking their cigarettes closer to the filter or nub; by smoking longer cigarettes, and by switching to cigarettes with higher tar and nicotine content.

The ultimate sin is that the government would become increasingly dependent on a sin tax to prop up its budget while carrying out the charade of caring about the health of the sinner.

“Tobacco is a cash crop for our state,” Governor Perdue has said in praise of Georgia’s tobacco farmers. Let’s not turn tobacco consumers into a cash crop, too.

Benita M. Dodd is vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (March 20, 2003). Permission to reprint in whole or in part is hereby granted, provided the author and her affiliations are cited.

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