Examiner Local Editorial: Unintended consequences of cigarette tax hikes

Opinion,Local Editorial

Maryland politicians don't learn from their past mistakes. Gov. Martin O'Malley has placed yet another cigarette tax hike -- which would raise the current $2 per-pack tax to $3, the sixth highest in the nation -- on his current legislative agenda.

O'Malley says he wants the revenue to help pay for Maryland's new health care exchange. But the last time Maryland raised its cigarette tax from $1 to $2 per pack back in 2007, things did not quite work out as planned. Proponents argued that raising the cost would induce smokers to give up the habit altogether. But after several years of steady decline, underage smoking actually went up the following year, according to the Maryland Department of Health and Mental Hygiene.

O'Malley also claimed that by doubling the cigarette tax, he could increase its revenue by 95 percent. That didn't happen, either. In fiscal 2009 -- the first full fiscal year following the tax hike, which went into effect on Jan. 1, 2008 -- the state collected only half of the anticipated revenue. Of course, the higher figure had already been built into the fiscal 2009 state budget, so this helped produce a deficit.

As Heartland Institute budget and tax specialist John Nothdurft noted at the time, "Maryland's 'successful' cigarette tax has increased a budget deficit that nonsmokers will end up paying for." Which is exactly what happened, of course.

But that was not the only unintended consequence. The higher tax encouraged smokers to purchase tobacco products in neighboring states such as Virginia -- which has the second-lowest cigarette tax in the nation -- and smuggle them back into Maryland. That's exactly what's happened in high-cigarette-tax Michigan, where the Mackinac Center estimates that lucrative, large-scale, long-distance cigarette smuggling from low-tax states now accounts for 29.3 percent of all tobacco consumption in the state.

Something similar is obviously happening in Maryland, where official cigarette sales plummeted from 276 million packs in 2007 to just 202 million in 2008. Maryland Comptroller Peter Franchot's office admits that cigarette smuggling has increased dramatically, even though it's a felony punishable by up to two years in prison.

The comptroller's office predicts even more smuggling if the cigarette tax is raised again without a corresponding increase on the enforcement side. But the cost would further erode returns while making criminals of people whose only crime is trying to escape punitive taxation on a completely legal substance.

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