Tax Justice Digest stories about South Carolina

It's safe to assume that there will be a special legislative session in Kentucky this summer. After all, the Blue Grass state is expected to face a billion dollar shortfall for the fiscal year starting July 1. Governor Beshear claims

The infamous "fair tax" legislation, which proponents are pushing all over the country, would eliminate corporate and individual income taxes, replace the lost revenue with increased sales taxes on a wide range of services, and eliminate most current sales tax exemptions. Before going too far down this path,

While reports such as those out of Iowa and Virginia (see “Budget Fixes Worth Embracing”, in this week’s Digest) highlight some of the best ways for states to dig themselves out of their current budgetary nightmares, in many cases it appears that the cigarette tax is continuing to hold on to its title as the single most popular tax to increase among the states.  Policy advocates and even many legislators are often careful to frame their support of cigarette tax hikes in terms of fighting smoking or reducing health care costs, but in times as desperate as these, it’s hard not to suspect that revenue needs may be the driving force.  The fact is that revenue from the cigarette tax is almost never sustainable over time because the U.S. smoking population is constantly on the decline.  It’s therefore difficult to get excited about the cigarette tax as a budget-fix for any period of time beyond the very short-term – and even then, states should never be excited about raising revenue through such a regressive tax.  But in states that have held their cigarette taxes constant at low levels for a number of years, it’s also hard to get too upset over such proposals.  Five states in particular made news this week in their debates over the cigarette tax:  Florida, Mississippi, Oregon, South Carolina, and Utah.

The three states with the most intense cigarette tax debates at the moment are Florida, Mississippi, and Oregon.  Florida and Mississippi haven’t increased their cigarette tax rates in 18 and 23 years, respectively, and therefore have some of the lowest cigarette tax rates in the nation.  Hikes in the range of 50 cents to $1 per pack are being proposed in Florida, while Mississippi’s debate appears to be over a range of 24 cents to $1 per pack.  In Oregon, the governor recently proposed a 60 cent hike as part of his budget.  The intent of that hike is use the new revenue as part of a package to expand health care in the state – such an arrangement is likely to result in tensions down the road as cigarette revenues fall and health costs continue to rise.

South Carolina provides another example of a state with a cigarette tax debate worth following.  In this past year’s session, the legislature approved a cigarette tax hike, only to eventually be vetoed by the governor, ostensibly out of concern over linking such an unsustainable revenue source to a permanent expansion of Medicaid.  As the appearance of a recent op-ed praising the benefits of hiking SC’s lowest-in-the-nation rate suggests, this debate is not yet over.

Utah provides another example of a potential budding cigarette tax debate.  With the American Cancer society enthusiastically seeking to capitalize on what appears to be a favorable climate for a cigarette tax hike, one has to expect the idea to pick up steam during discussions over how to close the state’s looming budget gap.

Kansas Governor Kathleen Sebelius this week again voiced support for a 50 cent cigarette tax hike, proposing that the revenue be dedicated to expanding health care coverage to more low-income Kansans.  This story should sound familiar, as numerous tax-phobic states in search of ways to pay for popular government services have recently turned to the cigarette tax.

The benefits that a higher cigarette tax would produce in terms of reduced smoking deaths and improved public health are well-documented in the recommendations included in a recent report from the Kansas Health Policy Authority.  But it’s the tension such an arrangement would create between efforts to reduce smoking, and efforts to fund health care, that is controversial.

Arkansas this year attempted to pass a similar cigarette tax hike dedicated to funding a new health trauma system.  South Carolina pursued similar legislation (eventually vetoed by the Governor) that was designed to direct new cigarette tax hike revenues into a popular health-care expansion.

In each of these cases, legislators were seeking to fund vital programs (each of which naturally increases in cost over time) with a revenue source that is sure to decline with time.  South Carolina briefly considered one interesting approach to this problem (indexing the amount of its tax to a measure of medical cost inflation) but that proposal was ultimately dropped from the final bill.

Sustainability issues arise not only from inflation, however, but also from decreases in the popularity of smoking, and increases in the incentives to purchase cigarettes in low-tax areas.  This latter component of the sustainability problem, in particular, has received a good bit of attention as of late.

With cigarette tax rates having increased substantially in many parts of the country, the rewards to smokers associated with shopping in low-tax areas have grown.  A recent study by Howard Chernick entitled “Cigarette Tax Rates and Revenue” found that a 10% increase in the cigarette tax rate of one state can boost the revenue collections of a neighboring state by about 1%.  Maryland provides one stark example of this phenomenon, where a recent tax hike has yielded significantly less than expected as a result of cross-border cigarette purchases and smuggling.  The experience of New Hampshire, however, may suggest that this point has only limited applicability (see next story).

South Carolina Governor Mark Sanford vetoed a bill this week that sought to increase the state’s cigarette tax rate, which is currently the lowest in the nation.  While the Governor supported the cigarette tax hike (as most people in the state do), he criticized the bill for linking the new revenues to a Medicaid expansion that would ultimately be unsustainable.

The cost of providing health care is constantly on the rise, and the real value of tax collected on each pack of cigarettes continuously declines as a result of inflation and other factors. The Governor, perhaps correctly, pointed out that the bill “virtually ensures future tax increases” in order to maintain consistent Medicaid funding.  Interestingly, this is precisely the problem the legislature tried to address in attempting to index the amount of tax to the rate of medical cost inflation (as was discussed in a previous Digest).

The Governor’s complaints about the bill’s lack of sustainability seem suspect when one considers the purpose to which he would like to see the revenue dedicated: an optional flat income tax that (primarily wealthier) taxpayers could use to avoid the state’s graduated rate structure.  If the Governor wants a tax cut that neatly offsets the cigarette tax hike, then his plan would fail this test dramatically.  While cigarette taxes exhibit some of the slowest growth (or even decline) of any tax, income taxes on the wealthy are among the most quickly growing revenue sources.  This is in part because income is becoming increasingly concentrated in the hands better-off individuals who pay at the top marginal tax rate.  Reducing the rate at which this income is taxed would almost certainly come to cost more than what the cigarette tax could provide.

During a recent debate over a proposed cigarette tax increase, South Carolina legislators briefly considered a unique proposal to index the amount of the tax to the inflation rate of medical costs – the logic being that without indexing the tax, the revenues it raised would soon fall short (as a result of inflation) of the amounts needed to maintain the health care expansion to which it would be dedicated.  The provision to index the tax has already been removed from the bill, but it nonetheless continues to provide an interesting context in which to discuss the cigarette tax.  With the cigarette tax being on the agenda of so many states in just the past few months, including Maine, Massachusetts, New Hampshire, New York, North Carolina, and the District of Columbia, to name a few, any new perspective with which to view this issue is certainly useful.

Though cigarette tax increases are often packaged as attempts to curb smoking, prevent teen addiction, or offset the various costs that smoking imposes on society, many policymakers either privately or publicly view the tax primarily as a method for obtaining revenue with which to enact or expand a favored program.  The problem is that the stream of funding produced by cigarette taxes always falls short over time as inflation erodes the value of tax collected on each pack sold.  Indexing the tax to inflation is one way to begin to remedy this problem.

The South Carolina proposal was especially interesting in that it explicitly tied the revenues raised to the cost of the program it would fund (health care).  The main problem with South Carolina’s approach is that smoking rates are generally on the decline – meaning the tax base upon which this revenue source depends is shrinking.  Indexing does nothing to solve this problem, and therefore should not serve as an excuse for policymakers to increase their state’s reliance on this regressive and unsustainable revenue source.

As an interesting aside, indexing the cigarette tax to inflation does make sense for states whose primary goal in taxing cigarettes is to curb smoking.  As inflation erodes the true value of the tax levied on each pack, the deterrent power of that tax is reduced.  Indexing the tax is the most reliable way to ensure that a consistent amount of tax is collected.