Why Tax Reform Should Include an Increase in the State’s Cigarette Tax

By Peg O'Connell, lobbyist and NC SPIN panelist

Every time I appear on NC Spin, I say that we need to restructure the tax system in North Carolina.  It is outdated, increasingly regressive, filled with exemptions and entirely too volatile.  In my 20 years of watching policymaking in this state, I think there have been 20 different committees and blue ribbon panels that have met to discuss the issue.  Unfortunately, nothing meaningful has happened.

So here we are again. Will the tax proposals set forth by the Republican legislative leadership actually gain traction and will there be a grand restructuring of North Carolina’s tax and revenue generation system?    This legislature is disciplined and focused and they are all on message: We must make our tax system more competitive with the states around us.

There are many intriguing ideas in these new tax proposals, some which may have merit and others that scare me to death.  However, if these tax reformers are true to their word and this is all about having taxes similar to other states, they are missing a most important opportunity:  Raise North Carolina’s tiny little cigarette tax to the national average.  It will bring in $378.93 million in new revenue annually; keep thousands of children from starting to smoke; reduce Medicaid expenditures and generally make our state healthier.  If your goal is to make North Carolina more competitive, this one change in tax policy is the Holy Grail.

We should increase our cigarette tax by at least $1, or more, as soon as the legislature comes back into session.  In case you are counting, increasing the cigarette tax by $1 per pack would bring North Carolina’s cigarette tax to the current national average of $ 1.45  and raise an additional $378 million in the first year.  More importantly, this one change in tax policy will have a huge positive impact on the health of the people of our state.

First a few facts:  North Carolina’s cigarette tax is currently 45 cents per pack—the 7^th lowest in the nation. Even South Carolina’s cigarette tax is higher than ours.  The tax in SC is 57 cents per pack.   More importantly, in contrast to our low cigarette tax, is the huge smoking-caused heath care cost to North Carolina—for every pack sold in NC it costs NC tax payers $7.17 per pack in health care costs to treat the serious chronic diseases brought on by cigarette smoking.  Every year, thousands of young North Carolinians begin to smoke, creating a huge long term health and medical liability for our state.

According to the Centers for Disease Control and Prevention, substantially increasing the state’s cigarette tax is the surest way to keep kids from starting to smoke and one of the best ways to get adults to quit.   For every 10 percent we increase the price of a pack of cigarettes, 7 percent fewer children start to smoke and the same is true for pregnant women.  As prices jump up, adult smokers also quit in greater numbers.  If we are worried about the impact of an increased cigarette tax on low income residents, think about the impact of a devastating tobacco related illness—like stroke, cancer or emphysema—on this same group. Or simply the cost of a pack of cigarettes—the average cost of a pack in North Carolina is almost $5.

Increasing the tax by $1 will generate $378.93 million in new revenue in the first year, and more importantly, reduce smoking among youth by 15%, preventing tobacco addiction among 78,400 of North Carolina’s children. This important public health measure will also reduce smoking among adults, help 71,000 people quit smoking, and save the lives of 44,700 North Carolinians from a premature smoking-caused death.  Aren’t these numbers of lives saved and chronic illnesses averted worth the $1 per pack? DUH!  Increasing the tax on cigarettes by $1 is a previously untapped source of revenue and it is a proven public health strategy to reduce smoking and will save lives. And, if we were to increase the tax rates on other tobacco products to parallel levels, we could add $61.50 million to the bottom line.  That is a total of $440 million in new revenue to the General Fund!

While it is true that ongoing reductions in state smoking levels will, over time, gradually erode state cigarette tax revenues (in the absence of any new rate increases), those declines are more predictable and less volatile than many other state revenue sources, such as a giant sales tax, state income tax, corporate tax revenues (which can drop sharply during recessions, as we have seen in the current economy). In addition, the smoking declines that reduce tobacco tax revenues will simultaneously produce much larger reductions in government and private sector smoking-caused costs. And in all honesty, this source of revenue could tide us over, while the tax gurus figure out what they need to do and can actually accomplish.

Our new governor and legislative leaders are all struggling with how our state can create new jobs, deliver state services and how we can fairly restructure the tax code  to pay for existing services.  They must be also concerned with the health and wellbeing of our fellow citizens—especially in these difficult economic times. Healthy people make for a healthy economy. Increasing the cigarette tax by at least $1 won’t solve all our problems, but it would be a huge step toward creating a sustainable source of revenue and, most importantly, would improve the lives and health of millions of North Carolinians.  I am clearly not a tax policy expert. I am a long-time health advocate, but I know this one thing to be true: if we really want to make our state more competitive, a $1 increase in the cigarette tax is the first big step in that direction.