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March 12th, 2009

Tobacco’s Impact on State Budgets

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State governments have a very interesting dilemma when it comes to selling tobacco products — cigarettes in particular. Moral and fiscal dilemmas emerge as governments attempt to walk the fine line between promoting health care initiatives and selling a product that generates millions in funding for their budgets despite killing hundreds of thousands of Americans each year.

Strapped with massive deficits, many states are deciding whether to raise their tax on tobacco products. Raising the tax on tobacco provides states the ability to pad their budgets’ general fund as well as provide cash for anti-smoking education and cancer research:

On Tuesday, [California] Sen. Alex Padilla (D-Van Nuys) proposed increasing the state tobacco tax by $1.50 per pack of cigarettes to provide money for the state general fund, anti-smoking efforts and lung cancer research, the San Jose Mercury News reports.

Padilla’s office estimates that the tax hike would yield about $1.4 billion annually.

Many state industries like health care are likely to suffer in the wake of budget deficits. States like Georgia are considering raising their tax on cigarettes to save medical programs and facilities:

Georgia’s 37-cent state tax on a pack of cigarettes is 44th lowest in the nation. Raising the tax by $1 could generate $298 million…

Gov. Sonny Perdue and lawmakers need that money to avoid inflicting serious harm to Georgia’s health-care system, especially to Atlanta’s Grady hospital and the statewide trauma network. Both need additional state financing; without it, Grady’s survival could again come into question…

This recession has put states across the union in quite a bind. States must decide how they can benefit most from selling cigarettes. Will states make the most money by increasing the sales tax (which will temporarily lead to fewer consumers purchasing the product) or leaving prices the same?

According to some research we found, estimates predict every 10% increase in price lowers sales volumes in this country by approximately 4%. Historical research also proves that consumption decreases with each additional tax increases. Yet over many decades, the tobacco industry’s sales have remained very resilient despite countless price increases. Cigarettes sales always find a way to rebound. Dedicated smokers will find a way to re-organize their finances to compensate for the rising cost of tobacco.

How ironic is it that states are able to provide significant funding for heath care by selling products that keep those people in business. Or is it even ironic at all?

Click here to view each state’s cigarette excise tax rates.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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