Last year, when I was still a Legislative Assistant in the Michigan House of Representatives, I had a front-row seat for the debate over House Bill 5632, the legislation that raised cigarette taxes by 75 cents and placed Michigan at #2 on the list for highest cigarette taxes in the country.
If my memory serves me correctly, the debate was utterly predictable. Those in support of the tax argued in two primary (and seemingly contradictory) directions: first, that the state desperately needed the increased revenues that would result from jacking up the tax in order to continue serving the low-income community’s health care needs through the state’s Medicaid program; and second that increasing the tax would be beneficial to public health because many smokers would be forced to give up the habit due to the drastically increased cost. This mindset is summed up nicely in this excerpt from Nurseline, a publication of the Michigan Nurses Association, which supported the tax increase:
It is estimated that with a 75 cent increase in the tobacco tax, there will be roughly a 13 percent decrease in youth consumption and a 7 percent decrease in adult consumption of tobacco. These declines in consumption will end up saving Michigan about $1,590 billion in long-term healthcare costs. Additionally, the revenues generated would protect health care for 200,000 Michigan children, improve the state’s health status by reducing smoking, protect thousands of Michigan health care jobs by earmarking the revenues to health care, and bring real dollars to Michigan from federal Medicaid matching monies.
Conservatives argued that a reasonable person might conclude that the second benefit (a reduction in smoking rates) would eventually cancel out the first (increased cigarette tax revenue) – although it would be just as reasonable to assume that a great many smokers wouldn’t quit smoking but would instead find ways – often illegal – to circumvent the new tax.
They also pointed out that the increased tax would disproportionately impact the poor, and would in the end be counterproductive in that it would greatly harm small businesses (such as gas stations and convenience stores), causing job losses and further hampering Michigan’s already struggling economy.
Needless to say, the tax was raised.
Now comes word in Wednesday’s Grand Rapids Press that much of what was predicted has come true:
Cigarette sales in Michigan are on track for the largest decline in more than 30 years, following a $2-a-pack state tobacco tax that went into effect a year ago this week.
Sales plunged about 19 percent between August and January, according to Orzechowski & Walker, a Virginia research firm backed by the tobacco industry.
If the numbers hold, the drop will exceed the state’s previous largest decline since the 1970s: 11 percent in 2003. That followed a tax hike that went from 75 cents per pack to $1.25.
So sales have tanked, but what of the positive public health effects? Surely the lower sales at Michigan retailers translate into greatly reduced smoking rates in the state, right?
…some have cut back or quit smoking since the tax went up. But some have simply have moved to cheaper, roll-your-own brands. Sales of the lower-taxed, loose cigarette tobacco have skyrocketed, according to retailers.
Many others, however, are breaking the law, buying cigarettes online or bringing them back from neighboring states with lower taxes — Ohio, Indiana, Illinois and Wisconsin, according to state and tobacco industry officials.
Well, the intentions were good. Unfortunately, because of those good intentions, a lot of people are losing their jobs:
Danny Rau, owner of Danny’s Party Store, 1554 Alpine Ave. NW, laid off two employees after the tax increase because his tobacco sales also were cut in half.
“It’s definitely hurt — drastically hurt,” he said.
Rau said a state effort earlier this year to crack down on sales of cigarettes on the Internet brought back some sales, but he doubts they will ever fully recover.
There is a silver lining, however:
In the first 10 months of collecting the tax, the state has taken in an additional $239.6 million — on track to meet or exceed estimates.
At least someone walks away from this story happy. In the end I am reminded of Tex Williams’ 1947 hit Smoke! Smoke! Smoke! (That Cigarette), although the lyrics might need a bit of a re-write in order to have modern relevance:
Buy, buy, buy those cigarettes
Spend, spend, spend until they’ve taxed us all to death.
If you wanna help the politicians
avoid some tough budgetary decisions
You’ve just gotta keep on buying cigarettes…
For more Acton perspectives on sin taxes, click here and here.
