Cigarette Tax Hikes: A Cautionary Tale from Alabama

Cigarette tax hikes are once again on the agenda in Indiana in the of Governor Daniels' latest proposal to hike the tax by at least 25 cents per pack. Daniels says he wants to use the money to help fund health care, but has also made noises in the past about using the cigarette tax as a stick to help discourage smoking altogether. Raising revenues and discouraging smoking are both fine ideas, but you can't have both.

The editorial board at the Birmingham News gives a helpful retrospective on Alabama's experience in balancing these objectives when they hiked the cigarette tax a couple of years ago. Back in 2004, Alabama lawmakers said they wanted to hike the cigarette tax for two inherently contradictory reasons: to raise money, and encourage people to stop smoking. The state got more money out of the deal, but doesn't seem to have discouraged smoking at all. But it's worth reading it straight from the horse's mouth:

Since Alabama raised cigarette taxes two years ago, state officials didn't exactly get what they expected.
The hope was that the hike in cigarette taxes, from a near rock-bottom low of 16.5 cents per pack to a still low 42.5 cents, would discourage some people, particularly teenagers, from smoking. At the same time, the higher tax would bring in badly needed money for the state's General Fund budget.
Officials got part of it right. Cigarette taxes did boost the General Fund, now ranking as the third-biggest source of money in the budget. (The bulk of sales and income taxes go into the Education Trust Fund for schools.)
But the notion that higher tobacco taxes would result in fewer smokers hasn't held true. Surveys by the state Department of Public Health show about one-fourth of Alabama adults smoke, the same as before the cigarette tax increase took effect.
Why no effect? Two reasons jump out.
First, Alabama's cigarette tax is still on the low side - 39th lowest in the nation, in fact, certainly not enough of an economic deterrent to lead smokers to kick the habit. The national average for cigarette taxes is 80 cents per pack, nearly double Alabama's. Some 20 states charge $1 or more per pack, while a handful of states tack on $2 or more.
But even a tax of more than $2 a pack might not be enough, health officials say. One study found that to have a real impact on smoking cessation, cigarette taxes must exceed $7 a pack. Raising cigarette taxes to that level isn't going to happen here, or in any other state.
Another reason Alabama hasn't seen a decrease is smoking is that the state is doing little to discourage the habit.
Despite the $162 million the state expects to take in this fiscal year in cigarette taxes and the $94 million it expects as its share of the national tobacco settlement, Alabama spends a minuscule amount each year to discourage smoking.
Only $682,000 is budgeted for this fiscal year for anti-smoking programs, ranking Alabama 46th among the states. Worse, it's only 2.6 percent of what the Centers for Disease Control and Prevention recommends.

The News gets it exactly right. Lawmakers perpetually talk out of both sides of their mouths on this topic, assuring balanced-budget advocates that they can count on cigarette tax revenues to help fund public services and assuring health advocates that their goal is to discourage smoking. Of course, the two goals are at cross-purposes. A moderate cigarette tax hike, such as the one enacted by Alabama two years ago, is most likely just not enough to get people to quit in itself-- which means that all Alabama has accomplished here is pushing even more of the cost of funding public services onto the backs of the low-income Alabamans on whom the cigarette tax falls most heavily.

There are, of course, good reasons to hike cigarette taxes. Smoker impose enormous costs on state health care budgets. If a punitive cigarette tax encourages smokers to quit, the loss in cigarette tax revenue will almost certainly be repaid in the long run through lower health care costs and a healthier workplace and living environment for Indianans.

But Alabama lawmakers, by doing virtually nothing to discourage socially harmful smoking, have made it clear that all they're really interested in is using cigarette tax revenues to avoid making less popular (but more fundamentally important) decisions about fixing the structural flaws in their income, sales and property tax laws. Hoosiers who recognize the need for additional tax revenue-- but are leery about using the cigarette tax to fill that need-- should watch closely to see if the proposed Indiana hike ends up being used in the same way.