Last year, Pennsylvania enacted a $2-a-pack cigarette tax in the City of Philadelphia to help bail out the city’s troubled school system. The tax came into affect on October 1st, but the state is already moving to increase cigarette taxes statewide. Sin taxes are the last fix for profligate legislators addicted to government spending.
First-term Governor, Democrat Tom Wolf, outlined an aggressive plan to raise a host of taxes in his first budget, including a $1-a-pack increase in the cigarette tax. The current state tax on tobacco is $1.60 a pack. The tax hike is expected to generate almost $400 million a year to be pushed into the general fund to boost education and other spending.
The commonwealth is entering its second month without a budget, after the Governor and the Republican Legislature failed to reach an agreement on a spending blueprint. Republicans recently passed a budget without any tax increases, but the plan was vetoed by the Governor.
Republicans are holding out for an agreement on moderating the state’s government pension system before it discusses increasing taxes. It is likely, however, that some tax hikes ultimately will be approved as part of a final deal.
Cigarette taxes, like other sin taxes, are often the easiest for politicians to raise. A new report from Governing Magazine found that, just since 2000, states have enacted 115 increases in tobacco taxes and 23 increases in alcohol taxes. Together the states collect over $32 billion a year in sin taxes, almost 4% of their total tax collections.
Pennsylvania, though, is a heavy abuser of sin taxes. The state ranks seventh in the nation for the amount of its budget it raises through sin taxes. Almost one-in-ten dollars the states collects comes from tobacco, alcohol or gambling taxes, far more than twice the national average.
The pitfalls of higher cigarette taxes, especially at the levels being discussed in Pennsylvania are well-known. Some sales, and the attendant taxes, will be lost to neighboring states with lower taxes. With cigarettes in Pennsylvania already more expensive than a bag of heroin, a number of legal sales will be lost to the black market and smuggling.
The real problem, though, especially for taxpayers, is that cigarette taxes are a declining source of revenue. For its first full year of implementation, the newly increased tobacco tax in Philadelphia is expected to bring in around $60 million. If the number of packs sold in the city had remained the same as it was before the tax was increased, though, the tax would have generated over $80 million. In other words, fewer packs are being sold as a result of the increase, whether by smokers cutting back, quitting or shifting their purchases to other areas.
City tax collectors expect the amount generated by the new tax to fall every year. In other words, a city or state will collect the most money in the first year a cigarette tax goes into affect. Revenue collections do down after that. Unfortunately for taxpayers, the spending that is supported by the higher cigarette tax doesn’t go down. It satisfies an immediate fix, sure, but the taxpayer will still be on the hook to cover the higher spending in the future.
In just the last three years, spending on education in Pennsylvania has increased by 10%, far above inflation. The Governor wants a higher cigarette tax to boost spending even more.
Raising tobacco taxes is the fiscal equivalent of going down to the pawn shop to squeeze out a few extra bucks for your budget. If the cash is to get you through a rough spot or pay down debt, it may not be the worst financial plan. Using the money to finance your daily life or splurge on a new HDTV will generally make you worse off.
The first step to beating any addiction, including sin taxes, is to admit you have a problem. Pennsylvania has a problem and the tough work of budget discipline is the only path to its recovery.