Tobacco Taxes in New Jersey and Pennsylvania – Up, Down, What?

Never let the facts get in the way of jacking up taxes.

Unfortunately, too many politicians think this way. They ignore the economic realities of higher taxes, and just plow ahead with proposed increases.

Just consider the following from a March 5 Philadelphia Inquirer story:

An odd thing happened the last time New Jersey raised its cigarette tax: It lost money.

According to advocates for lower taxes, that's because New Jersey smokers have cheaper purchase options nearby in Pennsylvania and Delaware, or online.

Pennsylvania also saw revenues fall when it last raised cigarette taxes.

Still, with both states facing mounting budget gaps, Gov. Rendell has proposed a cigarette tax increase and Gov. Corzine is considering one for the spending plan he will introduce Tuesday…

Gregg Edwards, president of the Center for Policy Research of New Jersey … pointed to New Jersey's recent revenue and cigarette sales. The state raised its cigarette taxes in fiscal years 2003, 2004, 2005 and 2007. In the first three instances, sales shrunk but revenue grew.

But after the last increase, which at the time gave New Jersey the highest cigarette tax in the nation, collections fell from $788.6 million to $770.5 million. Estimated revenues for fiscal year 2008 are $775 million, below the peak of fiscal year 2005…

Pennsylvania, too, saw revenue slide as taxes rose. Rendell raised cigarette taxes 35 cents in 2004. At first the commonwealth saw a modest income bump, but in the first full fiscal year after the tax hike, cigarette tax revenue fell by $72 million, roughly 8 percent. Revenue has never gotten back to fiscal 2004 levels, when the increase first hit.

What’s the deal? A big chunk of sales are moving underground and across state borders to avoid higher taxes. That also means lost businesses to small retailers. Combine this with the general decline in smoking, and keep in mind that all of the government programs that tobacco taxes are supposed to pay for keep on growing. This, of course, means other tax increases have been imposed, or are going to be imposed.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council