Raising Taxes = Less Tax Revenue

As various state governments experience budget shortfalls or general mismanagement, they turn on their constituents to bail them out. Unfortunately, the public is often smarter than their representatives...


In Chicago, an increase in tax on bottled water fails miserably and hurts inner city businesses:

Revenues from Chicago's new bottled water tax are trickling in -- at a rate nearly 40 percent below projections -- exacerbating a budget crunch that has already prompted Mayor Daley to order $20 million in spending cuts. January collections were $554,000. That's far short of the $875,000-a-month needed to meet the city's $10.5 million-a-year projection. Wendy Abrams, a spokeswoman for the city's Budget and Management Office, said it's too early to sound the alarm. "Since January is generally one of the coldest months of the winter, we don't think January collections are a strong indicator of potential revenue for the remainder of the year," she said.

David Vite, president of the Illinois Retail Merchant's Association, acknowledged that bottled water consumption rises with the temperature. But that doesn't explain away what Vite calls "enormous increases" in suburban bottled water sales, particularly in stores near the Chicago border.

Maryland picks a fight with smokers with an increase in taxes to $2/pack:

Residents of Maryland's Washington suburbs can shop in nearby Virginia, where the tax is only 30 cents a pack, and save at least $15 per carton.The Maryland pols are so afraid this is true that they've made it a crime for residents to carry two packs of cigarettes that weren't purchased in the state.

In other words, the state says it's legal to smoke, so long as you use cigarettes that the government can tax and thus become a financial partner in your bad habit. But if you dare to buy smokes across state lines, you can be fined.

More info on Public Enemy No. 1.


Tobacco taxes always increase revenue?

Not in South Dakota:

The increased tax on cigarettes produced $11.1 million for the state in the past two months, about $300,000 less than state revenue officials had estimated.

Not in Alaska:

In 2004, tax revenue from tobacco sales was at $838,666 but has steadily dropped and is predicted to fall to $514,425 by 2011.

Not in Pennsylvania:

While the amount of cigarette tax revenue decreases, the state also is owed about $9.3 million in cigarette and $1.1 million in sales and uses taxes Pennsylvanians are to pay when they purchase cigarettes online from companies outside Pennsylvania.

And where to go next?

Blair Candy Controller William Ajay said the business isn’t against government programs, but he doesn’t want to see one product beaten with taxes.‘‘Fast food — they’re starting to demonize that. It’s just a matter of time,’’ Ajay said.
Pat Dandrea agreed that fast food and other products may be next on the list of items to tax when the state needs money.‘‘Then they’ll come after glasses and lawnmowers,’’ he said. ‘‘It hits everyone. Look out on your cheeseburger at McDonald’s next year because they must get the money somewhere.’’

Not in Tennessee or New Jersey:

Tennessee has collected $47 million less than projected after a recent tax increase, and New Jersey’s cigarette tax revenues actually decreased between fiscal years 2006 and 2007, despite a cigarette tax increase.

Not in Maryland (also, see above):

Preliminary figures kept by his office show a drop-off in tax stamps on cigarette packs at the wholesale level from about 132.2 million in the first half of last year to about 99.5 million in the first half of this year.

The nearly 25 percent decline exceeds a 17 percent drop-off that fiscal analysts in Maryland had predicted when the tax increase was approved last year.

Although the higher tax rate has increased tobacco tax collections significantly, the larger-than-expected decline in sales means the state could be short of its budgeted revenue by $40 million to $60 million this year if current trends continue. The state had been projecting about $440 million in revenue from the tobacco tax this year.

William R. Phelps, manager of media affairs for Phillip Morris USA, said he is not surprised that tax collections are not meeting expectations in Maryland. During the special session, his company distributed research showing that revenue met projections in only eight of 40 states that raised tobacco taxes between 2003 and 2005.

As a counterpoint, here's some relentless optimism on Maryland's tobacco tax. Further down, lost amongst all the cheering and self-congratulation:

While the new revenue generated by the tax increase will go into the state’s general fund, the Legislature plans to use a portion of the revenue to expand access to health care for more than 100,000 uninsured Marylanders by making health insurance more affordable to small businesses and expanding Medicaid eligibility to lower income parents and other adults. Unfortunately, the Legislature did not allocate any of the new revenue for tobacco prevention and cessation programs.

Long before all the smokers have quit, died, etc., state governments will have to start looking somewhere else to make up for $14.9 billion.