Did cigarette tax increase do more harm than good?

March 17, 2010|By Marc Kilmer

In 2007, Gov. Martin O'Malley and the Maryland General Assembly enacted a number of tax increases designed to close the state's budget deficit. As this year's General Assembly session illustrates, these tax hikes did not fix the state's spending problems. Instead, they created problems for many Marylanders.

For instance, the cigarette tax is driving smokers to purchase their cigarettes in other states, hurting local businesses and depriving the state of tax revenue. A cigarette tax hike may be popular with politicians and public health advocates, but Marylanders are doing all they can to avoid it.

Supporters in 2007 believed cigarette tax hikes would increase state revenue and reduce smoking. The two goals have been partially met: the state did have more cigarette tax revenue, and it's likely some people were discouraged from smoking because a pack of cigarettes costs more. Neither of these results is as successful as advocates claim, however.

In Maryland, the $2-per-pack tax on cigarettes took effect Jan. 1, 2008. In 2007, there were 271 million packs sold. In 2009, there were only 199.7 million packs sold. It seems that consumers reacted to the new prices by reducing consumption of the product. But did they quit buying cigarettes because they quit smoking -- or did they buy their cigarettes elsewhere?

Looking at neighboring states' cigarette sales, it seems that at least part of the drop-off in Maryland cigarette sales is due to Marylanders buying cigarettes in those states. Pennsylvania, for instance, had been seeing a steady decline in cigarette sales since 2002. In 2008, though, as Maryland cigarette sales were falling, Pennsylvania sales increased by more than 7 million packs. Cigarette sales in the District of Columbia and West Virginia also increased from 2007 to 2008.

There is other evidence that our higher cigarette tax means more tax evasion. According to data from the federal Centers for Disease Control and Prevention, the number of smokers in Maryland decreased 5.8 percent between 2007 and 2008. The number of packs of cigarettes sold in the state decreased by 10.3 percent, though. In the same time period, arrests for cigarette smuggling increased drastically.

Clearly, some Marylanders quit smoking or reduced smoking between 2007 and 2008. But the increase in cigarette smuggling, the discrepancy between the reduction in packs of cigarettes sold and the number of smokers in the state, and the increase in neighboring states' cigarette sales indicate that some Marylanders -- maybe a significant number -- are taking steps to avoid the higher cigarette tax.

Those Marylanders who purchase their cigarettes within state lines have increased state tax revenue, but not as much as may have been expected. In fiscal year 2007, these smokers paid $278.2 million in taxes. In fiscal year 2009, they paid $405.6 million. That means a tax that raised the tax rate by 100 percent brought in only 45.8 percent more money -- not a very efficient way to raise revenue for the state.

Increasing the cigarette tax both raised revenue and decreased smoking, but only to a limited extent, and in doing so hurt Maryland businesses and smokers.

Marc Kilmer is a Senior Fellow at the Maryland Public Policy Institute. His e-mail is mkilmer@mdpolicy.org.

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