Fiscal Impact of Cigarette Tax Increases on Virginia’s Municipalities
In an effort to boost revenues, several local governments in the Commonwealth of Virginia have enacted over 50 cigarette tax increases between Fiscal Year (FY) 2010 though FY 2015. Local governments have used the additional revenue to fund specific projects, match tax rates in neighboring towns and recoup falling tax revenues.
Excise taxes such as cigarette taxes are especially problematic at the local level. First, they do not raise much money mainly because they are not a major source of revenue such as property or income taxes. Second, cigarette taxes are subject to jurisdictional competition as consumers go shopping for lower priced options. More sensitive to price increases than originally presumed, consumers purchase their cigarettes in a neighboring tax friendly town, out of state, or even on the black market. As a result local small businesses suffer the consequences, intended and unintended.
This study from the Thomas Jefferson Institute for Public Policy finds that the expectations for increased revenue have not been met. Moreover, this study finds that excise taxes are not the result of any argument for economic efficiency but rather the result of a political process which places excess burdens on consumers, especially lower income consumers, and small business. A tax system more reliant on a general, broader-based tax would be more appropriate to fund public expenditures than taxes on cigarettes.