The Thomas Jefferson Institute for Public Policy today released a new study showing the fiscal impact of cigarette tax increases on Virginia municipalities.
The study, Fiscal Impact of Cigarette Tax Increases on Virginia’s Municipalities, uses data published by local jurisdictions as part of their budget process and shows that municipal cigarette tax collections have been flat or falling since FY 2010; that tax hikes increase revenues by less than municipal budget projections would imply; and that tax revenue collection increases are fleeting, often turning flat or negative in the years following a tax increase.
“Municipal governments relying on increased cigarette taxes to balance their budgets usually see those projections disappear in a puff of smoke,” said Michael W. Thompson, chairman and president of the Thomas Jefferson Institute.
“These tax increases are changing consumer patterns: Smokers oftentimes cross over the border to a nearby town that has lower taxes and lower prices,” said Thompson.
Thompson pointed out that the Town of Vinton is the starkest example of this trend. In 2014 Vinton doubled its cigarette tax. But instead of meeting its budget projection of a 43 percent increase in tax revenue, cigarette tax revenues plunged by 17 percent as smokers drove elsewhere to make their purchases.”
“Worse,” said Thompson, “these taxes hurt that town’s small business community, resulting in the loss of two retailers and the opening of a cigarette outlet just outside the Town limits. This results in a further loss of revenue to the town through reduced sales taxes.”
“Last Tuesday’s election saw three out of four meals tax proposals defeated by an average 57 percent – even in areas where Hillary Clinton garnered 64 percent of the vote,” said Thompson. “The results demonstrated that Virginians have a high resistance to increased taxes, and when it comes to cigarette taxes, our study shows that they ‘vote with their feet’ by crossing the border to purchase elsewhere.”
“As municipalities begin the process of developing their budgets, instead of seeking tax increases whose effect can be temporary or negative, they might be better advised to seek efficiencies in their operations,” Thompson concluded.
The study was conducted by the Beacon Hill Institute in Boston, Massachusetts, which is currently a part of Suffolk University but will become a self-standing, independent institute on January 1, 2017.
The study may be downloaded by clicking here.
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