Panel Just Blew Smoke on Tobacco Taxes
October 17, 2008
William F. Shughart II
Taxes on tobacco yielded a paltry $55.6 million for Mississippi last fiscal year, or slightly more than .8 percent of the total taxes collected by the state. Yet that minor source of revenue has generated more ink and more hot air lately than any other state policy issue, except perhaps for the mysterious $90 million hole in the Medicaid budget that turned out to have been an artifact of accounting mistakes committed during the Musgrove administration.
Repeating the old saw that “the excise tax on cigarettes is lower in Mississippi than most other states,” Gov. Haley Barbour’s Tax Study Commission recommends increasing the cigarette tax from its current 18 cents per pack to either 36 cents or 50 cents per pack. The first figure is equal to the average cigarette excise tax in 10 southeastern states; the second is the average tax rate in the four states that border Mississippi.
To its credit, the commission does not pretend that its excise tax proposal is anything other than a revenue-enhancer for the state’s general fund. The commission does not, as others have done, explicitly tie an increase in the cigarette tax to a cut in the state sales tax on groceries. Nor does it attempt to justify higher cigarette taxes in public-health terms.
Making the sales tax less regressive by lightening the tax burden on low-income Mississippians is justification enough for cutting sales tax rates on food, clothing and books—or for exempting such items from sales taxation altogether. Greater fairness in one tax does not demand greater unfairness in another.
And the excise tax on cigarettes is very unfair. Indeed, because cigarette smoking is much more prevalent among individuals at the bottom of the income distribution than among those at the top, the excise tax on cigarettes is the most regressive of all taxes—even more regressive than the sales tax. The commission’s proposal to at least double the excise tax rate therefore amounts to a policy of balancing state tax collections on the backs of those who are least able to pay.
The commission also avoids common cause with the most vocal proponents of higher cigarette taxes, who argue that, owing to their greater morbidity and mortality, smokers impose an uncompensated burden on the state’s health-care resources. Careful studies of the external costs of smoking conclude, however, that smokers already pay their own way at current excise tax rates in every state, including Mississippi. Indeed, the state is more than justly compensated for any such costs when one adds the $20 million paid into the treasury every year by the major tobacco companies to settle former Attorney General Mike Moore’s lawsuit.
But the commission wants even more. It recommends imposing a new tax on cigarette manufacturers not already paying into the settlement fund. Big Tobacco likes this idea because it handicaps their smaller rivals.
As to the harm supposedly done to others by exposure to environmental tobacco smoke, a federal judge in North Carolina ruled in 1998 that the Environmental Protection Agency had committed numerous scientific and procedural errors in concluding that this smoke causes 3,000 lung cancer deaths a year in nonsmokers. According to the judge, the agency selectively disregarded relevant information, deviated from its own risk assessment guidelines after it became clear that the evidence supporting its foregone conclusion did not meet standard levels of statistical significance, and ignored the contradictory views of its own risk assessment experts. The EPA’s report linking environmental tobacco smoke to lung cancer in nonsmokers, in short, was rigged to push a particular politically correct point of view.
Cigarette smoking is in steep decline, falling at a rate of 1 to 2 percent per year nationwide. That trend will accelerate if the excise tax is increased, continuing to place downward pressure on tobacco tax revenues. The state can expect further revenue losses as Mississippi smokers cross borders to make their purchases in jurisdictions with lower taxes, especially if the tax goes to 50 cents per pack. At that rate, Mississippi’s excise tax would be higher than Alabama’s (42.5 cents) or Louisiana’s (36 cents).
Buying cigarettes online and from retailers on sovereign Indian lands would become more attractive options.
The commission offers no principled reasons for raising the state excise tax on cigarettes because there are none. It recommends a tax increase because, well, most other states impose taxes that are higher than Mississippi’s. That’s the same as Michael Moore saying that the United States should have a single-payer national health-care system because Cuba does.
William F. Shughart II is a Senior Fellow at The Independent Institute, Frederick A. P. Barnard Distinguished Professor of Economics at the University of Mississippi, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.