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Reason Foundation

Georgia's Proposed Cigarette Tax Increase Would Be Bad Policy

Tax hike would hurt state's businesses and the poor

David Godow
April 26, 2011

Georgia lawmakers, facing a $1 billion budget deficit, are being encouraged to balance the state budget with the help of cigarette taxes. Earlier this year, the state’s Special Council on Tax Reform and Fairness recommended increasing the cigarette tax by 31 cents to $0.68 per pack. Another proposal, backed by health interest groups, suggested raising the tax by a $1 per pack to $1.37, which would be in addition to the $1.01 per pack federal tax. Groups like the American Cancer Society, AARP and Georgia Association of Educators, are also pushing to convince the Republican-controlled legislature to make a cigarette tax hike a reality.

Cigarette tax advocates have one thing right: it's unfair that Georgians as a whole should have to bear the health care costs of people who choose to smoke. They note that taxpayers, through Georgia Medicaid, shell out about $537 million per year on smoking-related care for Medicaid recipients -- a substantial sum.

But if anti-smoking activists have a problem with subsidizing health care for other people, the remedy is simple: allow everyone to bear more of the costs of their own health care. Instead, by raising the cigarette tax, advocates simply want to shift the burden of these subsidies from the general population to smokers. The truth is that many Georgian smokers will not receive any government assistance with their health care -- thus, those citizens will not receive "subsidies."

Just as important for the state to consider is the cigarette tax’s impact on businesses. Right now, Georgia’s low tax rate encourages smokers from neighboring states to drive to Georgia and buy their cigarettes. With a tax increase, that revenue will be lost. 

And there are other financial warning signs from other states. New Jersey, which passed a cigarette tax increase in 2007, actually saw tax revenues fall by $52 million as smokers either quit or took their business elsewhere. New York's most recent cigarette tax hike, a $1.60 increase, resulted in a 27 percent decrease in sales. Though Georgia's proposed tax hikes are smaller, there is a very good chance that the state will see less tax revenue than expected and hurt small business store owners who rely on cigarette sales. 

Even if a tax hike brings in new revenues, that money will come out of the pockets of disproportionately needy Georgians. Cigarette taxes have repeatedly been shown to be regressive, meaning the poor pay a larger chunk of their income to the tax than the wealthy. It's curious why Georgia's tax reform council, which identifies one of its guiding principles as a "fair and equitable" taxation system, would punish the poor and target a minority -- 17.7 percent of the population that smokes -- as part of an effort to balance the state budget.

Georgia’s lawmakers have kept the state's tobacco taxes low even as they skyrocketed in other states. Now is not the time to change that. Instead, legislators in Atlanta should take a lesson from their colleagues in New Jersey and Rhode Island. Both states are currently considering reductions in their cigarette taxes, having suffered the consequences -- falling revenue and burgeoning smuggling -- of high cigarette tax rates. 


David Godow is Research Assistant


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