5 Things You Need to Know About the Cigarette Tax Increase

Just last week, the House Ways & Means Committee pushed through a 30 cent per pack cigarette tax increase as a proposed proviso in the FY10-2011 budget. The tax increase is the third cigarette tax hike considered in as many years. But, as opposed to last year’s bill passed by the House (H 3584), this new proposal signals the abandonment of attempts to tie the tax to Medicaid reform. Instead, House leaders seem to be settling for simply a tax increase. Revenue from the new tax would be set aside in a Medicaid Reserve Fund. This change is significant in that it seems calculated to insure passage of the tax increase by the Senate, some of whose members argued last year for using cigarette tax dollars to expand Medicaid. Here are five things you need to know about the cigarette tax increase:

 

This is a Tax Increase

It may seem obvious that this is a tax increase, but lawmakers don’t really want to highlight that fact. As we recently wrote regarding pending fee increases, legislators have long avoided taking blame for a general tax increase by passing what have, more or less, translated into broad based fee increases. Short of that, they’ve sought to pass what could be perceived as politically popular tax increases like this one. It is important to clarify that this is a tax increase because another proposal by Rep. Gilda Cobb-Hunter sought to impose a “health care user fee” cigarette tax increase of $1.27 per pack. When that attempt failed, the Ways & Means Committee instead passed an amendment introduced by Rep. Chip Limehouse to increase the tax by 30 cents. It should also be added that once the Medicaid Reserve Fund reaches a certain level, remaining revenue from the tax will be allocated to the General Reserve Fund, and then General Fund expenditures.

 

The Cigarette Tax is a Job Killer

 As economists say, every government policy has “unintended consequences” – which here means that every tax increase has a negative effect on the economy. Last session, the Policy Council demonstrated that raising the cigarette tax by 50 cents would cost 4,100 jobs. That’s 82 jobs for every 1 cent increase – or what would translate into 2,500 lost jobs for South Carolinians if the losses were exactly proportionate for a 30-cent increase.[1] Increasing the cigarette tax will not only hurt smokers, but reduce income for mom-and pop retailers and others. This is because raising taxes not only reduces demand for cigarettes, but siphons money away from other purchases smokers might make – for instance, on snack foods, beverages and alcohol. This is all the more true because smokers are on average poorer than other groups of taxpayers.

 

The Cigarette Tax is Unfair

It might seem that raising taxes on smokers and using the money to fund Medicaid is a fair way of making smokers pay their own health care costs. Yet lifetime health care costs for smokers are lower than for non-smokers because smokers have higher mortality rates. In any case, a tax increase is not a good strategy for making smokers subsidize their own public health care costs. A better solution is to provide incentives (using Enhanced Benefits Accounts, for instance) for smokers to quit; another option is to require smokers who are on Medicaid to contribute to the additional cost of their coverage. The point here is to make smokers pay for their own care, as opposed to passing a tax increase that brings about job and investment losses.

 

Spending is Already Too High

At the height of the “Great Recession,” lawmakers passed what was the second-largest budget in South Carolina’s history. While subsequent revenue declines resulted in mandatory budget cuts, the fact remains that spending is still very high. It is high both for core government services, such as education, and also for nonessential activities, such as economic development. Thus it is misleading to suggest that cigarette taxes must be increased to help pay for Medicaid. If funding Medicaid were a priority, lawmakers would be cutting non-essential programs first, instead of eyeing a cigarette tax increase. That is to say that the choice here is not between Medicaid and a cigarette tax increase, but between, say, $100 million in economic incentives for a mall developer and Medicaid.

In addition, Medicaid reform could help lower costs. Nationwide, approximately 70 percent of Medicaid spending is for optional populations and services, such as a chiropractic coverage mandate passed last year by the General Assembly. If lawmakers were serious about cutting Medicaid expenditures, they could begin to look at paring down some of these optional services (though not until federal stimulus matching funds expire). Free market reforms – such as allowing the purchase of health insurance across state lines – would also lower prices and facilitate the creation of policies specifically geared at making smokers pay for their own health care.

 

The Cigarette Tax is an Unreliable Revenue Source

Given that increasing the cigarette tax is going to destroy jobs and private investment, increased revenue from the tax will likely be exaggerated. In particular, increasing South Carolina’s cigarette tax will lead to reduced sales, especially for retailers in border counties. This is because South Carolina’s current state tax of 0.07 cents per pack is much lower than North Carolina’s (0.45 cents) and Georgia’s (0.37 cents) – or the national average of $1.34 pack. Raising South Carolina’s tax will reduce incentives for consumers in other states to buy cigarettes in South Carolina and also could lead to increased smuggling, resulting in a loss in revenue in both cases. Finally, because South Carolina’s per capita income is so low, raising the cigarette tax by any amount will have a greater impact on consumer behavior here than it would in most other states.

 

Conclusion

Before raising taxes to cover ever increasing Medicaid costs, the state should implement fundamental budget reforms aimed at cutting spending on non-essential programs and streamlining spending on core services. A cigarette tax increase is not only unnecessary; it is a job killer in the current –or, for that matter, any – economy. Likewise, a cigarette tax increase should not be passed as a proviso in the state budget. Taxpayers should instead demand that all proposed tax and fee increases be introduced as a separate piece of legislation subject to a recorded vote.

 

 

Nothing in the foregoing should be construed as an attempt to aid or hinder passage of any legislation.

 



[1]Granted, job losses would not remain equal for every cent increase. One might assume that the job losses would be lower for every incremental increase below 50 cents, but there may also be a tipping point at which additional increases result in fewer jobs lost per cent. A separate analysis would be necessary to establish the exact figure.

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