Baptists and Bootleggers, Tobacco Tax Edition

In an op-ed for The Daily yesterday, I noted several potential problems with Illinois Gov. Pat Quinn's proposal to close a $700 million of the $2.7 billion hole in its Medicaid budget with an additional dollar-per-pack tax on cigarettes.

It's almost certain not to raise the amount of money that backers project. As I noted, one of the biggest reasons why is that increasing per-pack taxes creates greater incentive for smugglers to bring in cigarettes from nearby jurisdictions with lower cigarette taxes.

But it also encourages cigarette smokers to shift their behavior in other ways. As USA Today noted last week, a Government Accountability Office report from last month indicates that pipe tobacco and cigar sales have risen dramatically in conjunction with increases in per-pack taxes. Pipe tobacco sales, in particular, have skyrocketed, rising from 240,000 pounds at the beginning of 2009 to more than 3 million pounds toward the end of last year.

The GAO report did not include a figure for state-level losses, but it did estimate that the federal government failed to raise between $615 million and $1.1 billion in tax revenue between April 2009 and September 2011 thanks to shifting behaviors. As USA Today notes, Treasury qualified that these are not actually "losses," but instead "estimates of the revenue increases if Congress were to change the law to eliminate the disparities."

This market shift has created one of those not-so-odd couple agreements between cigarette companies and public health advocates, both of which agree that pipe tobacco should be taxed at the higher rate. Cigarette sellers are warning that the GAO's numbers are actually too low: USA Today reports that "Liggett CEO Ron Bernstein, whose company sells discount cigarettes that are taxed at the higher rate, said his company estimates the tax loopholes have cost the government even more." No doubt his concern for federal tax revenues is genuine, and the competitive advantage of pipe tobacco's lower tax rates never even crossed his mind.

USA Today also quotes Gregg Haifley, a representative of the American Cancer Society Cancer Action Network. Responding to the GAO's revenue loss estimates, Haifley says, "That's real money and a tax avoidance scheme Congress ought to be interested in stopping," He additionally warns, "It's also counterproductive for the public health benefit of tobacco taxes." It is somewhat surprising to hear someone from an organization like this express any concern about federal tax revenues whatsoever: If dramatically lower smoking rates are the ultimate goal, then the revenues from cigarette taxes should eventually dwindle along with tobacco usage.