LAWMAKERS IN CONNECTICUT CONSIDER CIGARETTE TAX INCREASE
March 6, 2018
Lawmakers in Connecticut are considering a proposal to increase the state’s current cigarette tax by 22 percent, amounting to an additional $1 per pack in taxes. Gov. Dannel Malloy (D) has recommended a smaller 25-cents-per-pack tax.
These proposals come on the heels of a cigarette tax of 45 cents per pack that took effect in Connecticut on December 1, 2017. Currently, Connecticut and New York have the highest state cigarette excise taxes; both charge $4.35 per pack in taxes. If approved, the $1 tax increase would make Connecticut the highest taxed state for cigarettes; a pack of cigarettes would cost at least $1 more than all Connecticut’s neighboring states.
Whenever tobacco taxes are increased, residents buy cigarettes elsewhere, reducing revenues for the state, disproportionately burdening low- and moderate-income families, and leading states to rely on unstainable revenue sources.
Connecticut is no stranger to cigarette smuggling. According to the Tax Foundation, the state ranked 11th for “smuggled cigarettes consumed as percentage of total cigarettes consumed” in 2015. The Tax Foundation report found the rate of smuggled cigarettes in Connecticut increased by seven percentage points, or 125 percent, since 2006. Further, the Tax Foundation analysis concluded when the state’s excise tax on a pack of cigarettes was $3.40, more than a dollar less than it is now. The proposed legislation would likely cause the amount of smuggled cigarettes to increase significantly, and it could even lead to Connecticut becoming the state with the most smuggled cigarettes. (New York currently ranks first.)
In a recent commentary in the Hartford Courant, Michael LaFaive, senior director of fiscal policy at the Mackinac Center and Todd Nesbit assistant professor of economics at Ball State University examined Malloy’s “deficit mitigation” plan to increase the current tax by 25 cents per pack. The authors suggest, based on models examining the loss of revenue from other tax increases, the proposed legislation would create “a very small decline in revenue – 0.8 percent in the first year – as a direct result of tax evasion.” The dollar-per-pack tax increase proposal would generate an even steeper decline.
Making matters worse, increasing the cigarette tax will not produce the health effects legislators hope to accomplish. The Yankee Institute says the effectiveness of using taxes to influence people’s behavior is “in dispute.” Citing research by the National Bureau of Economic Research, Yankee Institute researchers conclude “tobacco taxes had ‘small and not usually statistically significant’ effects on tobacco usage.”
The legislation proposed by the General Assembly to increase the cigarette tax by one dollar would dedicate 50 percent of the revenue raised from the tax to “tobacco education, prevention and cessation programs.” The remaining funds would be allocated to the state’s general fund, yet current tobacco sales funds, especially those from the Master Settlement Agreement (MSA), have been used infrequently for funding tobacco cessation programs and education. The MSA was the “largest civil litigation settlement in U.S. history,” when 46 states settled with four cigarette manufactures to “recover Medicaid and other costs the states allegedly incurred in treating sick and dying cigarette smokers.”
The Yankee Institute found between 2000 and 2009, only $23 million of the $1.3 billion in tobacco settlement money had “been spent on anti-tobacco efforts including smoking education and prevention programs … and medical research.” The Yankee Institute highlights the Tobacco and Health Trust Fund in its analysis. The Tobacco and Health Trust Fund was created to “ensure [settlement] money would be put to intended use.” The fund accumulated $12 million annually, accumulating to “$134 million over its first nine years – about 10 percent of the total settlement revenue Connecticut [had] received.” In 2009, only $9.2 million had been approved for spending.
Legislators should also take note that tobacco tax increases are highly regressive. A Cato Journal article by Kevin Callison and Robert Kaestner concluded that from “2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000.”
Using tobacco tax increases to ease budget troubles disproportionately harms lower-income individuals and families and is only minimally effective at curbing consumption. The proposed tax hike will do nothing more than boost an already existing illegal market and create additional deficits that will need to be remedied by additional tax increases imposed in the future.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute or Tobacco Harm Reduction 101.