Smokers and non-smokers alike should be fired up about any proposed cigarette tax hike in Kentucky.
Some lawmakers, including House Speaker Greg Stumbo, claimed in the session just ended that a spike in the tax rate, from 60 cents to $1 a pack, would raise $100 million a year and help patch the $30 billion unfunded liability in Kentucky's pension system.
Although they found another way to raise the money, the principle involved doesn't change.
Expanding the size and scope of government is their solution to a problem that in fact stems from uncontrolled expansion of the size and scope of government.
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Unfortunately, cigarette tax hikes would ultimately harm consumers, retailers and the economy, all while likely failing to meet revenue estimates. Picking an easy target in "sin taxes" is an obvious cover for reckless fiscal management, and Kentuckians should see right through such a politically motivated gambit.
For one, low-income earners are more likely to smoke, and thus a 67 percent tobacco tax hike would hit Kentuckians suffering most during the continued economic uncertainty. According to 2011 figures from the U.S. Centers for Disease Control, 43.4 percent of adults in Kentucky who earn less than $15,000 are smokers. Furthermore, a 2007 study by the Heritage Foundation showed roughly half of smokers live in households below 200 percent of the poverty line.
A heavier cigarette tax would also fall on small businesses. The National Association of Convenience Stores reports that cigarettes account for about $1 out of every $3 of total sales nationwide at their establishments. However, the potential for disruption to Kentucky's business climate is especially acute.
The neighboring states of Illinois, Indiana and Ohio currently tax cigarettes at a significantly higher rate, and many Kentucky retailers benefit from this competitive advantage.
If a 40-cent tobacco tax hike were ever approved, not only would there be fewer out-of-state customers but also many Kentuckians would head to states like Missouri, Tennessee, Virginia and West Virginia, where tobacco tax rates would be significantly lower.
While they're picking up a pack of cigarettes, shoppers could buy gas, food and other items that help to grow the state's economy. Elected officials shouldn't drive that income — and revenue — away from Kentucky because they cannot manage responsibly.
Finally, lawmakers typically overestimate the new revenues from higher cigarette tax rates and seek additional tax increases. National Taxpayers Union's 2008 study found that 41 of 59 state tobacco tax increases from 2001 to 2006 were followed by more tax hikes within two years.
In Minnesota. a 2005 cigarette tax hike was estimated to generate an additional $174 million a year. Since then, the revenue has increased by a measly $4 million a year — just 2.72 percent of the original estimate. Following a major cigarette tax rate boost in 2010, the District of Columbia reported that it collected $15 million less than expected, and $7.6 million less than it collected prior to the tax hike.
Clearly, tobacco tax increases have very real fiscal implications not only for National Taxpayers Union's 2,900 members in Kentucky but also for economic activity across the state. Lawmakers should stop chasing illusory tax hikes and start pursuing honest reforms.
Lee Schalk is state government affairs manager of National Taxpayers Union.
Feb. 13 Herald-Leader article, "Cigarette tax hike floated for pensions; Stumbo considers 40-cent increase"