Federal Cigarette Tax Hike Could Affect State Plans

A new federal cigarette tax increase is complicating efforts by states to use tobacco taxes to plug holes in budgets and fund programs, the Wall Street Journal reported Feb. 8.

At least 16 states are considering cigarette tax increases to help cover budget gaps that the National Conference of State Legislatures estimates will total $47.4 billion in 2009. However, the new 61-cent federal tax increase, included in a children’s health insurance bill, takes effect in April 2009 and could lead to reduced cigarette sales, more counterfeiting, and less-than-projected state tax revenues. States could significantly raise their own taxes to offset the expected drop.

The current average state cigarette tax is $1.19 a pack.

Although higher prices reduce cigarette consumption — a 10-percent price increase per pack equals an approximate 4 percent drop in consumption — tobacco-tax revenue has continued to rise in nearly every state that has imposed significant tax increases, said Frank Chaloupka, an economist and tobacco-tax expert at the University of Illinois at Chicago.

In Mississippi, where competing versions of tax legislation are under debate in the House and Senate, the federal tax increase “throws the state’s proposals up in the air” since tax-revenue projections need to be recalculated, said Dan Turner, a spokesman for Gov. Haley Barbour.