New Federal Tobacco Tax Could Hinder States’ Efforts To Offset Budget Gaps, Fund Programs

A 62-cent-per-pack federal tax increase on cigarettes to fund an expansion of CHIP could hinder efforts to raise state cigarette taxes, the Wall Street Journal reports. President Obama last week signed into law CHIP legislation that will be funded by an increase in the federal cigarette tax. According to the Journal, the legislation comes as at least 16 states are considering raising cigarette taxes by as much as four times the current amounts to offset "gaping budget holes" or fund state programs.

The federal cigarette tax will increase from 39 cents to $1.01 per pack in April. The average state cigarette tax currently is $1.19 per pack. The national average cost for a pack of cigarettes, excluding federal and state taxes, is $4.32, according to the Campaign for Tobacco-Free Kids. Public health experts contend that increasing cigarette prices is one of the best methods to reduce smoking, especially among teenagers. According to the Journal, the higher federal tax "could alter [states'] calculus" because higher cigarette prices likely will decrease sales and decrease states' projected revenue from cigarette taxes.

Despite the potential for less revenue, states still might raise cigarette taxes to make up for the expected drop in cigarette sales, according to Frank Chaloupka, an economist and tobacco-tax expert at the University of Illinois at Chicago.

According to the National Conference of State Legislatures, states face total budget deficits of $47.4 billion for the 2009 fiscal year. The Journal reports that state tobacco taxes collected $15.26 billion in revenue in 2007 (McKay, Wall Street Journal, 2/9).