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Cigarette Taxes Do Not Usually Produce Projected Income

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Taxes are a funny thing.  They can’t be relied on to produce the amount of money governments hope to collect from those who pay.  Over and over again, it has become reality that in most cases the more government taxes something, the less that government receives in the long-run from those taxes.

This was again proven in a recent study by the Thomas Jefferson Institute when it looked at the reality of cities and towns here in Virginia that have increased the cigarette tax.  That study,  Fiscal Impact of Cigarette Tax Increases on Virginia’s Municipalities, uses data published by local jurisdictions as part of their budget process and shows that municipal cigarette tax collections have been flat or falling since FY 2010; that tax hikes increase revenues by less than municipal budget projections would imply; and that tax revenue collection increases are usually fleeting, often turning flat or negative in the years following a tax increase.

This study was done to see if “sin taxes” such as those on cigarettes truly produced the income that local governments hoped would be the case.  In most cases these taxes fell short and, in some cases, produced even less than had been the case before taxes were raised.  Rarely did these particular tax increases bring in more money than projected and in most cases much less. 

Municipal governments relying on increased cigarette taxes to help balance their budgets usually see those projections disappear in a puff of smoke.  This is clearly the case as this new study shows. 

And this study also indicates that these cigarette tax increases are changing consumers’ buying patterns: smokers oftentimes cross over the border to a nearby town or county that has lower taxes and lower prices.  And when a smoker goes to another jurisdiction to buy a carton of cigarettes, that person usually buys others consumer items as well.  That might be only a soda at a convenience store, or it might be the week’s groceries at the super market.  When several dollars can be saved on a carton of cigarettes, it is not hard to believe that the shopper looking for bargains or carrying “food coupons” with him or her will also seek savings on their cigarettes.

The Town of Vinton is the starkest example of this trend. In 2014 Vinton doubled its cigarette tax. But instead of meeting its budget projection of a 43 percent increase in tax revenue, cigarette tax revenues plunged by 17 percent as smokers drove elsewhere to make their purchases.

Worse yet, these taxes hurt that town’s small business community, resulting in the loss of two retailers and the opening of a cigarette outlet just outside the Town limits. This results in a further loss of revenue to the town through reduced sales taxes.

Last month’s election saw three out of four meals tax proposals defeated by an average 57 percent – even in areas where Hillary Clinton garnered 64 percent of the vote. These results demonstrated that Virginians have a high resistance to increased taxes, and when it comes to cigarette taxes, this new study shows that consumers will ‘vote with their feet’ by crossing the border to purchase cigarettes and others items elsewhere.

As municipalities begin the process of developing their budgets for next year, instead of seeking tax increases whose effect can, in most cases, be temporary or even negative, they might be better advised to seek efficiencies in their operations or policies that encourage economic growth rather that those that push business out of the area.

One city that is talking about raising cigarette taxes is Richmond.  This issue became part of its recent mayoral election rhetoric.  As the new mayor considers a budget for next year, he might want to read this new analysis.  A good review of this study ran in the Richmond Times Dispatch and can be found here.

This study was conducted by the Beacon Hill Institute in Boston, Massachusetts, which is currently a part of Suffolk University but will become a self-standing, independent institute on January 1, 2017.  We hope it is helpful to cities and towns as they craft their budgets for next year and think about how to build a stronger economic base in their communities for the future.

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