Since Fiscal Year 1999 (FY99), federal and state governments have increased their cigarette excise tax rates more than 100 times. In 2009, the federal government raised the federal excise tax on cigarettes by the largest amount in history, adding another 62-cents to the price of a pack of cigarettes. At the state level, many state legislatures have looked to cigarette tax increases to help fill budget shortfalls. Many of these tax increases have created additional incentives for smuggling; promoted purchases through untaxed or lower-tax venues, harmed retailers and small business owners and unfairly burdened adults who smoke. This page provides a national view of the impact of raising taxes on cigarettes.
Of the 57 state excise tax increases that were implemented between FY 2003 and FY 2007, only 16 met or exceeded projected revenues. In the other instances, states fell short of projections by as much as 181 percent. In December 2006, Arizona increased its cigarette excise tax by 82-cents per pack. Over the following 12-month period, tax-paid sales fell by more than 32.5 percent, and the state missed its revenue projections by 48 percent. In March 2007, Iowa increased its cigarette excise tax by $1.00 per pack. Over the following 12-month period, tax-paid sales fell by more than 35 percent, and the state missed its revenue projections by 17 percent.
See the full list.Cigarette excise tax rates differ significantly between states. When a state raises its cigarette tax, it can lead to unintended consequences – including altered consumer purchasing patterns in which consumers seek their products from lower tax or even untaxed sources. These venues may include nearby states with lower tax rates, the Internet or Native American territories. This deprives their home state of expected revenue and harms local retailers. For example, after Maryland implemented a $1.00 per-pack cigarette excise tax increase in 2008, law enforcement seized four times as many out-of-state cigarette packs as compared to the same time period the prior year. Following a $1.00 increase in the state cigarette excise tax in 2007, Texas witnessed Internet cigarette purchases by Texas residents increase from 2 percent of total national online sales to 17 percent.
In 2002, New York City saw a decline in the tax-paid sales volume of cigarettes of almost 50 percent following a $1.42 increase in the city excise tax and a $1.50 increase in the state excise tax. According to a March 2006 New York Department of Health study, 57 percent of smokers purchased cigarettes at least once from a low-tax or untaxed source and 37 percent of smokers purchased low-tax or untaxed cigarettes regularly.
In July 2006, New Jersey’s cigarette excise tax increased from $2.40 per pack to $2.575. The 17½ cent tax increase was expected to raise an additional $30 million. Instead, following the cigarette tax increase, tax-paid cigarette sales actually declined by 9.2 percent, leading to a revenue loss of $22.2 million.
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Total state tax-paid sales have declined by an average of 3 percent per year from 1999-2008 resulting in a loss of $23.7 billion in federal tax, state tax and tobacco settlement revenue. As a point of comparison, medical care costs have grown by an average of 4.2 percent per year between 1998 and 2007. Federal outlays have been growing at an even faster clip: 5.7 percent per year between 1998 and 2007. Relying on a declining revenue base to fund important government programs is akin to sweeping the problem under the rug. The long-term funding needs still exist. They have simply been overlooked, leaving the problem for the future.
With the rise in state cigarette excise taxes in recent years, law enforcement has also seen a sharp increase in illegal trafficking of contraband cigarettes. As one agent in the Federal Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) has stated, “There is no doubt that there’s a direct relationship between the increase in a state’s tax and an increase in illegal trafficking.”Another agent has described the breadth of the criminal organizations that have been linked to contraband cigarettes: “When it comes to smuggling and counterfeit [cigarette] stamps, traditional organized crime is involved, terrorist groups are involved and street gangs are involved.”
Cigarette excise tax increases may also accelerate the growth of illegally imported cigarettes as well as imports of counterfeit cigarettes manufactured in countries such as China. U.S. Customs and Border Protection’s 2008 mid-year seizure statistics show a substantial increase in cigarette seizures compared to the same time period the previous year and lists cigarettes in the top ten commodities seized.
According to the National Association of Convenience Stores, cigarette sales account for 32.9 percent of all in-store sales at convenience stores nationwide.
Tobacco excise tax increases may be costly to retailers and small business owners. When users of tobacco products react to a tax increase by shifting their purchases across state lines or to other sources, where taxes are often not collected, in-state retailers lose sales and revenues. The impact of this purchasing shift on retailers becomes even more pronounced when tobacco purchases are bundled with other products, such as gasoline and groceries.
