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March 23, 2018

To solve Kentucky’s budget woes, lawmakers recently proposed increasing the state’s cigarette tax. The proposal would increase the state’s cigarette excise tax by $.50 per pack, bringing the total tax to $1.10 per pack.


Kentucky’s current cigarette tax rate is higher than those of two of its seven bordering states. If the excise tax is increased to $1.10, only three of the neighboring states will have higher cigarette taxes than Kentucky, according to the Tax Foundation.


Such disparities drive consumers to purchase cigarettes in neighboring states or on black markets. In 2015, the Tax Foundation ranked Kentucky ranked 37th among the states in cigarette smuggling. Arkansas, with an excise tax of $1.15 per pack, ranked 25th. It is likely an increase in  Kentucky’s cigarette tax will cause an influx of smuggled tobacco, which will reduce tax revenue and worsen the state’s budget problems.


Cigarette taxes are highly regressive and disproportionately impact lower-income persons. 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” according to a Cato Journal article by Kevin Callison and Robert Kaestner.


Despite Kentucky’s relatively low tax on cigarettes, smoking rates in the state have been dropping, the United Health Foundation reports. Jim Waters, president and CEO of the Bluegrass Institute for Public Policy Solutions, noted teen smoking rates have dropped as well, “revealing that education and cessation campaigns are much-more-effective approaches to help address” cigarette smoking rates.


It is important to note that the revenue raised by the tax increase would not be devoted to public health costs linked to smoking. Instead, it is an attempt to increase revenue to address Kentucky’s growing public employee pension crisis. Kentucky currently uses very few funds for education and tobacco-control programs.


The state was projected to collect more than $100 million in funds from the state’s Master Settlement Agreement (MSA) in 2017. The MSA is the settlement reached in the 1990s after states began suing tobacco manufacturers to recover Medicaid and other costs states allegedly incurred in treating sick and dying smokers. Kentucky uses very little of these funds for education and tobacco-control programs: only $2.4 million in state funds were allocated to tobacco prevention programs in 2017.


Tobacco taxes and sin taxes are an unreliable source of revenue. Although a sin tax may create a short-term increase in revenue, it often leads to a future revenue decrease. In the long term, sin taxes create budget shortfalls. “Between 2008 and 2013, only two out of 40 revenue actions that raised the tobacco tax were followed by  cuts in other taxes, and from 2001 to 2011, just 29 of the 101 tobacco tax  increases in that time met or exceeded revenue projections,” The National Taxpayers Union Foundation reports.


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 the illegal market and create additional deficits that will have to be remedied by additional tax increases imposed in the future. Kentucky should consider pension reform and comprehensive tax reform rather than depending upon unreliable tax revenue streams.

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.

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