In light of ongoing state fiscal issues, Washington Gov. Jay Inslee is proposing a raft of tax hikes.
There are numerous problems with all of these proposed increases (and I’ll write about several of them in this and succeeding posts), but Inslee’s desired jump in taxes on cigarettes sold in our state is one of the three more ironic ones he’s pushing. Why? Inslee has always billed himself as a progressive Democrat. And yet he’s going all in for a tax hike that would if enacted be extremely regressive, as well as very fiscally unsound.
This 2012 study found that poor smokers spend about 14 percent of their household income on cigarettes. According to the left-leaning Center for Budget and Policy Priorities, 29 percent of poor adults smoke, compared to 18 percent of non-poor adults. A 2007 study by the Heritage Foundation indicates that even before the economy hit rock bottom, more than 25 percent of smokers lived below the federal poverty line, with a further 25 percent living between the poverty line and 200 percent of it. These are the people Inslee wants to tax more, and in so doing, he wouldn’t even be shoring up the state’s revenue base in a sound manner.
There’s a general economic principle that if you tax something, you get less of it. In this case, what Inslee is trying to do is more heavily tax the consumption of legally purchased cigarettes. That might work well from a fiscal standpoint if no smokers were going to quit in response, or alternatively locate, buy and consume untaxed cigarettes that are purchased illegally. But when cigarette taxes go up, some smokers do quit just like anti-tobacco campaigners want them to (we’ll come back to Inslee’s solution to that problem in a bit). But most shift to buying illicitly sold smokes. Inslee doesn’t seem to have a solution to this conundrum, despite the fact that he’s trying to hike the tobacco tax in an already high-tax state that is full of Native American reservations where state tax is often not charged on cigarette purchases made by non-tribal buyers, and which borders Idaho (which has a much lower tax rate than Washington).
Given this situation, it is unsurprising that Washington has one of the highest rates of inbound cigarette smuggling of any state. Nearly half of all cigarettes consumed here are smuggled and thus have gone completely untaxed by Olympia or local governments. Nationally, cigarette smuggling deprives governments of $5.5 BILLION per year. A fair chunk of this amount is the loss sustained by Washington.
It is unclear why Inslee wants to double down on this problem. Some more conspiracy-minded critics of his plan argue that by pursuing this kind of bad tax policy, he’s making it easier for Washington progressives to force through a state income tax, and a high one at that. More often than not, states that pursue cigarette tax increases wind up missing their revenue targets (in some cases, they even bring in less total revenue after the tax hike than they did before it, as happened in New Jersey and DC), meaning they have to find different, supplemental sources of revenue in future. In this case, that different, supplemental revenue source could be the kind of income tax we see in most American states, but which Washington voters oppose. Irrespective of the reason, doubling down on the smuggling and lost revenue problem seems to be exactly what Inslee is trying to do.
A second problematic component of Inslee’s tax plan is his proposal to jack up taxes on e-cigarettes. This, too, is ironic. Part of the logic for cigarette tax hikes is to force people to quit smoking or at least reduce their likelihood of killing themselves with cancer in chasing their nicotine fix. Higher e-cigarette prices mean more expensive devices of the type that a friend and her husband claim helped them quit smoking, and which various health studies and experts out there—including former U.S. Surgeon General Dr. Richard Carmona, former American Lung Association president and CEO Charles D. Connor, and Medical and Executive Director of the American Council on Science and Health Dr. Gilbert Ross—seem to think are less likely to kill than inhaling smoke from a tobacco-filled stick the user set on fire. (Side note: The R Street Institute also has a good post on why this tax increase is silly). But by setting a high tax rate on e-cigarettes, I suppose at least theoretically, Inslee might be dealing with the revenue problem posed by people quitting smoking, as long as they all try an e-cigarette instead of going cold turkey or using Nicorette (given the weather in the Pacific Northwest, I bet most will just go the Nicorette route, though).
Legislators should think carefully about the lack of logic behind these proposals as the session gets underway. There are better budgetary solutions than tax hikes, including the regressive, fiscally unsound and just plain nonsensical ones discussed here. I’ll write more about the third highly ironic tax hike proposal from Inslee in a separate post.