2003 July – Backgrounder #41 – Ra⁠i⁠se Exc⁠i⁠se Taxes? No⁠t⁠ In Flor⁠i⁠da

By: The James Madison Institute / 2003

Executive Summary

• Anticipated revenues have slowed for the Florida 2003-04 fiscal year and some argue that new revenues are needed to balance the state budget. Predictably, some will argue that excise taxes should be increased to enhance state revenues. Proponents contend that such an increase will both promote public health by reducing harmful cigarette smoking while easing the financial problems of the state.
• Florida’s cigarette excise tax of 33.9 cents per pack was raised sharply in the early 1990s (for example, in 1990, it was 12 cents per pack). Cigarette levy increases are the reason that the tobacco product component of the Consumer Price Index has risen more than any other component, including that for health care and college tuition fees.1 While the state’s current tax is below the median of all states, it is significantly above that of Georgia and Alabama.
• The three most important excise taxes–those on tobacco, alcohol, and gasoline–burden lower income Americans more than upper income persons. Any attempt to finance a fiscal revenue shortfall by increasing existing excises will serve to increase the tax burden of lower income Floridians in general and minority groups in particular.
• The Internet has revolutionized cigarette retail sales and raising excise taxes would increase the outflow of business to e-commerce retailers. For this reason, even if excise taxes temporarily raised revenues, the ultimate defection of customers to Internet purchases may make the long-term revenue effects neutral or even negative.
• Florida reached an agreement with the largest tobacco companies to settle litigation related to tobacco-related health care costs in 1998. The settlement amount was an estimate; the precise amount depends on the consumption of cigarettes produced by the major manufacturers. Consequently, if Florida were to increase its cigarette excise tax, the volume of cigarettes consumed will fall or shift to nontaxed sources of cigarette products, which in turn will reduce its settlement revenues.
• This study argues that new excise taxes on cigarettes and other tobacco products would raise little new revenue and would not materially resolve state budget woes.2 Moreover, the tax would create other problems– compliance, equity, and resource allocation issues–that would outweigh any modest increase in revenues obtained.