More (Tobacco) Money More Problems

These are the interpreted words (except for the word “tobacco”) spoken by the late rapper Notorious B.I.G.  Unfortunately, these words run true not only when it comes music lyrics, but also in real life and even government spending.  Unfortunately, the more money the government takes in the more it wastes.  This is true when it comes to defense waste as it is with entitlement programs like SSDI and Medicare.  Now it is even true when it comes to tobacco taxes and settlement money.  As a December 6, 2012 story in The New York Times reported, “States are on track to collect a record $25.7 billion in tobacco taxes and settlement money in the current fiscal year, but they are set to spend less than 2 percent of that on prevention, according to the report, by the Campaign for Tobacco-Free Kids, which compiles the revenue data annually.”

While the results of the report should be disappointing to most taxpayers and even antismoking advocates, it is par for the course the way governments spend money.  As the Times explained, “The settlement awarded states an estimated $246 billion over its first 25 years. It gave states complete discretion over the money, and many use it for programs unrelated to tobacco or to plug budget holes. Public health experts say it lacks a mechanism for ensuring that some portion of the money is set aside for tobacco prevention and cessation programs.”  The one bright spot with this type of mismanagement is that governments only have themselves to blame if they don’t have enough resources for anti-smoking campaigns.  The loser in this is likely the taxpayer because even if there is not enough money in a budget for an anti-smoking campaign it will likely be diverted from a more worthy program or even worse, financed from a tax increase.  The most likely group to be taxed are the tobacco makers, who saw a large increase in their product in 2009 to finance children’s’ healthcare.  USA Today reported (about the effect of the 2009 tax increase) that “the tax hits hardest on families who make less than $50,000 a year and account for two-thirds of smokers.”  So in the end the poor consumer pays for the mismanagement of government money through higher taxes.

Now, it appears that folks are smuggling tobacco to avoid paying these taxes, thus reducing government coffers and completely undermining the rationale for any tax increase.  According to CNN, “The Tax Foundation said that 60.9% of cigarettes sold in New York State are smuggled in from other states.  This makes New York the biggest importer of black market cigarettes, along with the state’s highest tax rate of $4.35 per pack. That’s compared to Missouri, the state with the lowest rate, of 17 cents per pack.  In New York City the tax rate is even higher, adding another $1.50 per pack to the state rate. It’s not uncommon for smokers to pay $12 for a pack.”

This cyclical passing on of higher taxes can be avoided with better management of existing revenue sources.  Governments have shown time and time again to be poor stewards of taxpayer resources, (you only need to look to the $800 billion stimulus bill to see taxpayer largess being used on a turtle tunnel,) so it is no myth that the bungled mismanagement of a windfall like a tobacco settlement would be no different.

From misspent funds to increased smuggling of tobacco products, higher tobacco taxes seem to be counter-productive and a waste of money.