State, federal cigarette taxes to hit $3 per pack on April 1

AZ officials expect federal hike to reduce smoking - and revenue
Arizona Capitol Times
Thursday, March 12, 2009
Christian Palmer

State programs that receive revenue from the sale of tobacco are expected to see collections dwindle after a federal tobacco tax takes hold on April 1.

Tax revenue collected from tobacco sales in Arizona have dipped since two sin taxes went into effect in 2007. And the federal government's 62-cents-per-pack increase will only accelerate the rate of decline, according to both health experts and tax watchdogs. Tobacco-tax revenue earmarked for health care, corrections spending and the state's general fund will decline by about 5 percent, if trends during the past two years hold up. Forecasts by the Joint Legislative Budget Committee show the state will collect $387 million in fiscal 2009, compared to $407 million in fiscal 2008.

Right now, Arizona's cigarette tax rate hovers at $2 per pack, and beginning in April the federal levy on packs will rise to $1.01 from 39 cents to raise money for the federal State Children's Health Insurance Program (SCHIP).

The state's largest tobacco tax increase occurred in 2006 with voter approval of Prop. 203, the First Things First children's health care proposal. The measure led to an 80- cents-per-pack tax, which led to a drop in sales as well as revenue for other state programs.

The JLBC has not released estimates to project the upcoming federal tax hike's impact on state revenues.

Kevin McCarthy of the Arizona Tax Research Association said he expects taxable tobacco sales to plummet.

Increased prices have driven consumers to buy more cigarettes from businesses on American Indian reservations with low tax rates and on the Internet from businesses located in areas with lower levies, McCarthy said.

"Now that taxes are two bucks a pack, that's a big incentive if you smoke three packs a day," said McCarthy, who was an outspoken critic of the First Things First initiative.

The Arizona Tax Research Association in 2006 criticized the proposition for a number of reasons, including the political expediency of applying burdens squarely on smokers. Now, McCarthy said he finds the 80-cent tax has driven down taxable tobacco sales to the detriment of other tobacco-funded programs.

Future revenue is likely to be impacted by declining tobacco use, which, health officials are quick to point out, is a positive development. In 2007, the U.S. Center for Disease Control and Prevention reported 19.8 percent of Arizona's adults smoked cigarettes, compared to 23.5 percent in 2002.

Trading tobacco revenue for lower smoking rates is more than a bargain, said Arizona Department of Health Services spokeswoman Laura Oxley. The health department pegs the cost of smoking-related health care in Arizona at about $3.6 million per day.

"Smoking is horrendous as far as the long-term cost to the state, to the taxpayers," she said. "We would definitely take a hit in tobacco tax collections if we could get more people to stop because, in the long run, that's a better investment in people's health."

But getting people to stop smoking is difficult, said Oxley, whose department recently unveiled its "Brought to you by addiction" anti-smoking media campaign.

"We'd love to believe it's education that has got people to stop smoking, but we're also realists and know that a lot of people avoid taxes by buying (cigarettes) off the Internet and across the border and on reservations," she said.

The department pays for several of its programs through taxes implemented with the 1994 voter approval of Prop. 200, an initiative that raised the tobacco tax to 58 cents a pack from 18 cents, Oxley said.

The programs include chronic disease prevention efforts against breast and colon/rectal cancer, stroke awareness and the treatment of chronic respiratory and pulmonary illnesses caused by smoking.

The department also operates ASHLINE, phone and Web site services intended to help smokers break their habit, and pays for the distribution of some anti-smoking medications distributed through the Arizona Health Care Cost Containment System, Oxley said.

The decline in taxable tobacco sales following the First Things First ballot proposition led to an overall decrease in tobacco-related funds destined for the department, said Oxley, who believes the SCHIP levy will apply similar downward pressure.

Oxley said the initiative was approved by voters and the department is already grateful for its secured funding stream for tobacco-related health care and smoking prevention and cessation efforts.

Oxley said she hopes the incoming tax will help prompt more Arizonans to quit smoking cigarettes.