Cigarette Taxes and Unintended Consequences

“Health groups” held a rally in Santa Fe yesterday to push for hiking the state’s taxes on tobacco. It’s a familiar refrain — smoking kills, it drives up the costs of “public” health insurance, government must aggressively target bad habits, yadda, yadda, yadda.

But those who consider tobacco-tax hikes a silver bullet for revenue-creation and improved health outcomes don’t study the issue closely enough. Smokers respond to higher coffin-nail taxes in several ways. One is border-crossing. As a Clovis clerk lamented in 2010, when New Mexico’s tax became higher than the levy imposed by our neighbor to the east, “All the Texas-jumpers are going to stay home. Why pay more and use your gas to come up this way?”

Smuggling is another byproduct of higher cigarette taxes. Recent work by the Mackinac Center for Public Policy and Tax Foundation found that smuggled smokes’ share of  total cigarette consumption in New Mexico is quite high — fourth in the nation. “Excessively high taxes” on cigarettes, researchers wrote, foster “many other unintended byproducts,” including “violence against police, people and property.”

After New Mexico’s last cigarette-tax hike, revenue did rise. But the “progress” was brief: For the past five fiscal years, the funds generated have been flat. (See graph below.)

However popular, higher taxes on politically incorrect products aren’t the answer to New Mexico’s fiscal woes. The state’s spending gap must be closed with smart cuts and an effective economic-development strategy that yields adequate revenue for government’s legitimate duties.