Cutting deficit with smoke

Cigarette tax may hit $2 to trim shortfall, governor says

September 08, 2007|By Andrew A. Green | Andrew A. Green,Sun reporter

Gov. Martin O'Malley said yesterday that the state is likely to raise its tobacco tax - perhaps by another $1 a pack - to help solve its budget woes.

"I do think there is the will to raise the tobacco tax," O'Malley said, referring to his negotiations with legislative leaders. "We will probably see some sort of increase."

It was the second day in a row that O'Malley had floated the beginnings of a tax plan. The governor's comments on WTOP-FM's Politics Program with Mark Plotkin came a day after he said that an increase in the sales tax and an expansion of that levy to cover more services are also likely as Maryland grapples with an expected $1.5 billion gap between revenue and spending.

FOR THE RECORD - An article and graphic in yesterday's Sun misstated the current cigarette tax rate in Delaware. As of Aug. 1, Delaware raised its tax to $1.15 per pack.
The Sun regrets the error.

The House of Delegates approved a $1-a-pack increase to the tobacco tax this spring as part of a plan to expand Medicaid, but the measure died in the Senate. O'Malley said this summer that he wants to expand Medicaid, but yesterday he said he has reservations about using an increase in the tobacco tax to pay for the expansion.

"There are some that want to expand health coverage in Maryland with that tax, and yet that tax is a declining source of revenue," O'Malley said.

A $1 a pack increase in the tobacco tax would be worth about $220 million in the first year but less after that as higher prices encouraged people to quit smoking, according to a fiscal analysis by the Department of Legislative Services.

Maryland's tobacco tax is now $1 a pack, which ranks 20th nationally, according to the Federation of Tax Administrators. Virginia's rate is 30 cents a pack; Delaware and West Virginia charge 55 cents a pack; and Pennsylvania's rate is $1.35. Seven states now charge at least $2 in taxes per pack - New Jersey has the highest rate, $2.575.

Despite O'Malley's comments, advocates of the tobacco tax for health care proposal were pleased.

"We commend Governor O'Malley for expressing support for the $1 tobacco tax increase," said Vinnie DeMarco, president of the Maryland Citizens' Health Initiative. "By itself, it will keep 50,000 kids from smoking, save thousands of lives from tobacco-caused deaths and save the state billions of dollars in health care costs."

Del. Peter A. Hammen, a Baltimore Democrat who chairs the Health and Government Operations Committee, said the proposal to use the tobacco tax to pay for health care was crafted so as to be financially stable. It relies on some surplus funds and savings from the reduction in uncompensated care that would come when more people have insurance.

"You have to be a little creative in how you structure it," Hammen said. "I believe the bill that passed the House is sustainable."

But Sen. Ulysses E. Currie, the chairman of the Budget and Taxation Committee, said he's still not convinced. He said it's difficult to predict how many people will quit smoking as a result of a tax increase, so the state could find itself in a hole if it funds a Medicaid expansion that way.

But that doesn't mean the Senate objects to raising the tobacco tax in general, Currie said.

"If it's part of the $1.5 billion solution as opposed to tying it to Medicaid, that's very different," said Currie, a Prince George's Democrat.

Republicans have vowed to fight against any tax increases, saying that a combination of reductions in the rate of spending growth plus new revenue from slot machines would balance the budget.

"We don't believe tax increases are necessary," said Sen. David R. Brinkley, the minority leader from Frederick County.

How revenue from an increase would fit into O'Malley's plan for addressing the budget deficit is unclear because he has not unveiled his proposal. He said recently that he has developed the outlines of a plan but that details are in flux because of negotiations with General Assembly leaders. He has said he wants to hold a special session of the legislature to enact a plan but will do so only if he can achieve consensus soon.

The governor has long identified spending cuts, tax increases and slot machine gambling as the three prongs of his strategy to eliminate the so-called structural deficit. He has still not provided details, but his comments in the past few days have begun to suggest the likely shape of the tax package he will introduce, either in a special session this fall or in January's regular session.

He has also suggested that he will try to make sure that corporations aren't able to evade the income tax, to close a loophole that allows limited liability corporations to transfer property tax-free, and to make the individual income tax more progressive.

O'Malley also reiterated on the radio yesterday that he sees slots as a necessary component of the budget solution.

"We're getting drips and drabs every day, but you're kind of getting the idea of where the governor is going to go," said Senate President Thomas V. Mike Miller.

The Democrats who control the General Assembly have traditionally been split on taxes, but the size of the projected budget shortfall appears to have shaken up the stalemate.

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