By Jim Waters
Raising the specter of hiking cigarette taxes is – for cash-starved politicians, big-government health nannies and their opinion-page enablers – the policy equivalent of ringing Pavlov’s bell.
Seeing “cash trays” rather than ashtrays, these big spenders experience racing heartbeats and sweaty palms while dreaming of raking in millions more into government coffers for pet projects.
Gov. Steve Beshear in his recent tax proposal endorses raising cigarette taxes by 40 percent, which would push Kentucky’s rate to $1 per pack – higher than all but two surrounding seven states. Beshear – with sweaty palms, I’m sure – claims this tax hike will generate $125 million for the state.
Not so fast, governor. In its analysis of Beshear’s tax proposal, Americans for Tax Reform warns: “raising tobacco taxes does not necessarily raise revenue.”
ATR points out, for example, that Illinois received $138 million less than expected after raising taxes by $1 per pack, which nearly doubled the state’s cigarette tax to $1.98.
“What’s more, local small businesses lost tens of thousands of dollars as a direct result as consumers (began) purchasing tobacco across state lines,” ATR reported.
In a recent USA Today op-ed, I pointed out some of the consequences of cigarette tax increases on Kentucky and its people:
Considering that 40 percent of Kentuckians live near the border of a surrounding state, a large cigarette tax hike would cause the profits of many small convenience stores – especially those bordering states like Missouri, Tennessee, Virginia and West Virginia, which then would have significantly lower rates – to go up in smoke.
Such a tax increase also would disproportionately affect lower-income residents, one-third of whom light up. While some might quit as a result of a tax increase, many instead will decide not to buy that gallon of milk or put off purchasing badly needed shoes for their kids to wear to school in order to feed their habit.
The Tax Foundation also casts doubt on attempts to justify cigarette tax increases by claiming it’s a way of compensating society for costs imposed by smokers by pointing to a series of studies that argue: “nearly all the costs of smoking – health care, higher insurance premiums, lower productivity at work – are borne by smokers themselves.”
Beshear’s boldest tax idea seizes on the populism-driven policy of socking it to smokers but he misses a cigar-sized opportunity to offer a courageous plan that actually grows Kentucky’s economy.
Beshear proposes anemic reductions in the individual income tax for Kentucky’s middle class and corporate income tax rate cuts of a measly one-tenth of 1 percent.
Meanwhile, North Carolina Gov. Pat McCrory a few months ago signed into law a 25-percent reduction in the personal income tax, which moves his state from a tiered personal income tax with a top rate of 7.75 percent – the South’s highest – to a flat 5.75 percent. The bill also cuts North Carolina’s corporate tax rate by more than half – to 3 percent.
McCrory is endorsing reforms that will cap his state’s gasoline tax, repeal the estate (“death”) tax and fully exempt Social Security income from North Carolina’s income tax.
He understands that no government ever taxed its way to prosperity, and that the surest way for government to obtain needed revenues for vital programs is to grow his state’s tax base by expanding its economy.
Meanwhile, the biggest ideas Beshear seems to muster are: raising gasoline taxes by $45 million, hiking cigarette tax rates by 40 percent and raising retirees’ taxes by $176 million by reducing retirement-income tax breaks, and – as ATR notes – “subjecting more of their well-earned and saved income to taxation.”
Really? Is this the best Kentucky can do?
I hear an emphatic “No!” coming from Tar Heels.
Jim Waters is president of the Bluegrass Institute, Kentucky’s free-market think tank. Reach him at email@example.com. Read previously published columns at www.bipps.org.