“If it sounds too good to be true, it probably is.”
This timeless adage has many relevant applications, but perhaps it applies best to the proposals and promises often made by public officials who sometimes underwhelm, or in some cases, cause economic harm.
Unfortunately, it appears that an aspect of President Obama’s 2014 budget proposal falls into this category.
The president and a few members of Congress have proposed a 93 percent increase in the federal excise tax on cigarettes — from the current $1.01 per pack to $1.95 — as a quick way to raise the $75 billion in federal funding for the President’s early learning initiative.
The $75 billion only accounts for the federally funded portion of the program — states would be responsible for matching funding that grows each year. Because government spending programs often end up costing much more than initially projected, the participating states could be on the hook for untold billions of dollars in the decades to come.
I admire the president’s commitment to expanding access to early education, but a massive tax increase on tobacco is not a sustainable or wise way to pay for it. Everyone supports early learning, but the reality is that using a tobacco tax increase as part of the funding source could place a significant financial burden on millions of Floridians while potentially falling short of its revenue collection target.
The tobacco tax increase may cover the majority of the program in the first year, but after that, the cost burden quickly switches to the states. After nine years of escalating state payments, states would be required to contribute three times the amount of the federal contribution in year 10 and possibly shoulder all of the costs of the program beyond.
Even if Florida chooses not to participate, we would still likely feel some pain from the funding of the program. The federal tobacco tax increase would hit the Florida economy immediately, burdening adult tobacco consumers, some of whom earn incomes far lower than the state and national averages, and also harming the retail industry.
The lawful sale of tobacco products to adult tobacco consumers is still a major part of our economy. This is especially true in convenience stores, where sales of tobacco products are a leading source of revenue, accounting for almost 40 percent of in-store sales. Many of these stores are small businesses, and collectively they pay millions of dollars in state taxes each year and provide jobs for members of their communities from the Panhandle to the Gold Coast.
A tobacco tax increase could fuel the black market for tobacco products, driving business from law-abiding retailers to illegal sellers.
Rising tobacco taxes can lead to illegal cigarette sales, and what has happened in Florida provides an example of this trend. According to an investigation by WFTV Channel 9, the ABC affiliate in Orlando, since 2006 Florida’s taxes on cigarettes have increased 294 percent. And in that same period, the amount of cigarettes smuggled into the state has tripled. Potentially decreasing lawful retailers’ sales with an ill-considered tobacco tax increase could deprive Florida of jobs and tax revenue just as we’re seeing signs of real economic recovery.
On balance, then, the unknown additional burden on the states and the proposed tobacco tax increase is potentially punitive to our state and national economies, unfair to adult tobacco consumers and small retailers, and possibly incapable of properly funding the president’s early education initiative. The president and members of Congress need to take on the hard work of finding a way to fund this program without increasing taxes or overburdening state budgets.
David Shepp is the executive director of the Florida Association of Wholesale Distributors.