States seeing less tax revenue from cigarettes

BLOOMINGTON, Minn. -- Roland Henkel quit smoking in September and has been doing the math ever since: A week added to his life. More than 2,100 Marlboro Lights he hasn't smoked. And more than $400 he didn't spend on cigarettes.

"It does add up," said Henkel, 53. "You don't think about it when you're smoking so much."

The state of Minnesota has been doing the math, too, and isn't quite as delighted.

Because of quitters like Henkel, Minnesota's tobacco tax revenue is expected to go into a gradual slide later this year -- a drop that may grow even steeper with the expected passage of a smoking ban.

Across the country, states are putting their treasuries under pressure by adopting smoking restrictions as well as higher cigarette taxes, which appear to be discouraging people from lighting up, as many health activists had hoped would happen.

State Sen. David Tomassoni, a Democrat who opposes a statewide smoking ban, said he worries about the lost tax dollars.

"The taxes on smoking are being used to fund education, they're being used to fund health care, they're being used to fund real things. Now, if we eliminate smoking, does it mean that those things go away?" Tomassoni said.

Opponents of smoking don't mind if the take from smokers falls.

"The wonderful thing about tobacco revenues is when they go down, there's less smoking," said Eric Lindblom at the Campaign for Tobacco-Free Kids in Washington.

It is clear that states could see some medical savings from reduced smoking, but it is difficult to say how much or whether those savings might offset the lost tax revenue. Minnesota's Department of Human Services estimates it spends $295 million a year to treat smoking-related illnesses for 647,000 people on public assistance.

Political expedience

The downturn in revenue won't necessarily cause states any immediate major hardship, since the decline is slow and cigarette taxes represent only a small portion of state budgets.

But up to now, they have been a reliable and politically expedient way of raising revenue to solve budget problems. Sin taxes on things like cigarettes are "the most socially acceptable form of taxes you can raise," said Bob Kurtter, a state budget watcher at Moody's Investors Service.

Just over a fifth of U.S. adults smoked in 2005, down from about one-fourth a decade ago. Because of the downturn, states levied taxes on 2.8 billion fewer packs in 2005 than they did just five years earlier.

In 2005, tobacco taxes contributed $13 billion to state budgets. But cigarette tax collections that year were down in 15 states compared with the year or years before, according to a study backed by the tobacco industry. States such as New York, Massachusetts and Illinois are all forecasting a drop in revenue.

Similarly, the federal cigarette tax has been bringing in less money each year since 2002. The amount dropped from $8.1 billion in 2002 to $7.7 billion in 2005, according to the same study.

Cigarette taxes are now "a lousy way to fund your government," said David Brunori, who teaches tax policy at George Washington University. "The government is not letting you smoke anywhere."

Thirteen states, including California, Colorado and New Jersey, prohibit smoking in bars and restaurants, and Arizona will make it 14 in May. An additional six states do not allow smoking in restaurants, according to the American Lung Association.

Also, all but a few states have jacked up their cigarette taxes in recent years. In many cases, lawmakers did so with a combination of motives: to raise revenue, at least in the short term, and to discourage smoking by making the habit more expensive.

Minnesota slapped an extra 75-cent charge on a pack of cigarettes because of budget problems two years ago. The state expects to collect about $451 million from smokers this year but is projecting a drop of about 1 percent a year, or $4 million to $5 million -- and that is does not even take into account the potential effect of a statewide smoking ban.

California banned smoking in bars and restaurants in 1998 and raised its cigarette tax 50 cents a pack in 1999. Tobacco tax revenue boomed, then started to decline. It has leveled off at about $1 billion a year in the past few years, thanks to a crackdown on counterfeit tax stamps, said Anita Gore, a spokeswoman for California Board of Equalization.

Henkel, a security company supervisor, kicked the habit after 35 years out of concern for his health. He regularly checks a Web site that tracks how long it has been since he quit -- "Four months, 22 days and maybe about 20 hours," he said last week -- and the effect on his wallet and his health.

"It told me that I've gained seven days of life," he said.