State depends heavily on those who still puff
Wisconsin cigarette smokers, thanks for paying for the state’s prison system for six months out of the year.
You cigarette smokers are expected to pay $590 million in state taxes for that habit during the budget year that ends June 30. That’s about half of the annual $1.1 billion budget of the state Department of Corrections.
Wisconsin’s cigarette tax has been a volatile source of revenue in recent years, but it remains the fourth-largest source of general-fund tax collections—behind only the personal income tax ($6.7 billion), sales tax ($4.1 billion) and corporate income tax ($852.9 million).
It’s unusual for a state government to be that dependent on its cigarette tax, observed a veteran budget analyst in the Denver office of the National Conference of State Legislatures. The analyst didn’t know which states rely as much as Wisconsin on their cigarette tax, however.
Cigarette smokers got a double whammy in 2009: Wisconsin raised its per-pack tax by 75 cents—from $1.77 to $2.52, on Sept. 1. And the federal government more than doubled its tax—from 39 cents to $1.01 per pack—in April of that year.
According to the national Campaign for Tobacco-Free Kids, Wisconsin’s cigarette tax is ninth-highest among states; Illinois is first, at $4.35, and Missouri’s 17-cent tax ranks last. The highest combination of state and local taxes is $5.58 per pack in New York City, followed by Chicago, $4.66.
Wisconsin has the highest cigarette tax of its neighboring states: Michigan, $2 per pack; Illinois, $1.98; Minnesota, $1.60; and Iowa, $1.36.
In 2009, Democrats who controlled the Capitol offered two reasons for a 42 percent increase in Wisconsin’s cigarette tax: Fewer people—especially youths—would smoke. And state government needed the money.
But cigarette tax collections peaked at $604.8 million in the 2010 budget year and have been falling since then—to a projected $590 million this year and to $580 million next year.
Some theories: Wisconsin’s statewide indoor smoking ban reduced smoking. More Wisconsin smokers are buying over the Internet, illegally avoiding the $2.52-per-pack tax. The recession, and the combination of higher state and federal taxes, meant fewer people started to smoke, smoked less or quit.
Todd Berry, president of the nonprofit Wisconsin Taxpayers Alliance, noted that state government collected the cigarette tax on 29 percent fewer packs between 2008 and ’09, when the state tax was raised. He blamed “tax evasion” for part of that decline.
Stephanie Marquis, a spokeswoman for the state Revenue Department said it’s a “challenge” for states to collect taxes on cigarettes sold over the Internet.
“Without a federal law, a seller in another state may not have nexus—or connection—to Wisconsin,” Marquis added. “Without that connection, we don’t have the authority to require sellers to collect and remit the appropriate taxes.”
The latest “Measuring Success” report of the taxpayers alliance said smoking by Wisconsin adults actually increased slightly—to 19.1 percent—between 2009 and 2010.
“Sales are primarily declining because of an underlying change in cultural attitudes toward smoking,” Berry said.
He added, “Successive tax rate hikes are not as effective in getting a revenue bounce as the rate gets higher.” Wisconsin’s 75-cent increase in 2009 followed a $1 per pack increase on Jan. 1, 2008.
When cigarette taxes go up, Berry said, “The ‘easy to quit,’ ‘want to quit’ smokers do stop.”
“Hard core” smokers keeping smoking, Berry said, but may try to avoid paying the $2.52 state tax or use alternate tobacco products, including increasingly popular electronic cigarettes or “e-smokes.”
It’s bad public policy for a state government to rely so heavily on cigarette smokers and the taxes they pay, Berry said.
“From a tax collections perspective, the policy is shortsighted,” he added. “The very goal of a tax hike, from a health perspective, is to reduce consumption and, therefore, revenue. And even without a tax hike, consumption is declining. It’s not a reliable long-term tax base.”
Smokers, if you don’t like to think of yourselves as paying for the state’s prisons for six months, here’s another way to think of it: What you pay in taxes amounts to six months of state aid to the 26-campus UW System.
Steven Walters is a senior producer for WisconsinEye. This column reflects his personal perspective. Email firstname.lastname@example.org.