Discussions are under way in the General Assembly to raise the tax on cigarettes in Maryland. Although Gov. Martin O'Malley and certain key members of the Assembly are opposed to it, a bipartisan coalition is backing the plan. Raising cigarette taxes, however, brings with it a unique set of problems that may result in less revenue and cost the state more to enforce compliance than advocates claim.
If some policymakers get their way, Marylanders will be paying $2 in taxes on each pack of cigarettes they buy in the state. That is a 100 percent increase from the current tax of $1 a pack. More significantly, it is also much higher than any of Maryland's neighbors. If results from other states are any indication, a significant number of Marylanders will start buying cigarettes out of state, leading to much less tax revenue than anticipated. The side effect will also mean that Maryland businesses that sell cigarettes, such as gas stations and convenience stores, will lose sales to out-of-state businesses.
Washington state is finding this out the hard way. It recently raised cigarette taxes to $2.03 a pack, higher than all but two other states. Tobacco consumers reacted as any other consumer would: They sought lower prices elsewhere. What has this produced? According to state experts, about 25 percent of all cigarettes smoked in Washington were not purchased within the state. That translates into roughly $200 million in taxes annually that are being lost by the state.
In some parts of Washington, such as the Seattle area, this out-of-state buying mainly comes from people purchasing cigarettes online or through catalogs. In the eastern part of the state, however, low-tax Idaho draws many customers. Indian reservations, which do not collect the cigarette tax, also draw their fair share of customers.
Maryland would do well to heed this example. The $2.03 tax on cigarettes in Washington is only a few cents more than the $2 tax being proposed here. Also, like eastern Washington, the entire state of Maryland is close to areas that have much lower cigarette taxes.
The tax rate in the District of Columbia, where many Marylanders work, is only $1. For those who live on the Eastern Shore, nearby Delaware charges only 55 cents a pack. Virginia is even lower at 30 cents a pack. If a quarter of all cigarettes consumed in Washington were purchased in a way to avoid a high cigarette tax, it makes sense that the same would happen in Maryland.
To combat the avoidance of this tax, Washington has begun cracking down on online retailers as well as trying to stop people at the border who are bringing in large quantities of cigarettes. If Maryland were to raise its cigarette taxes, we could expect the same waste of taxpayer dollars here.
Supporters of raising the cigarette tax justify it in the name of paying for new spending. Much of that new spending is of questionable merit. Even if it were not, however, relying on a cigarette tax is risky business. Cigarette use is declining, and with that comes a decrease in cigarette tax revenue. When you add on the inevitable measures people will take to buy cigarettes out of state, you have a very shaky funding base for this new spending. With the state facing a large structural deficit, we cannot afford new spending schemes that rely on uncertain cigarette tax projections.
Our state should not seek to emulate the problems of Washington or other states that have imposed high cigarette taxes on their citizens. Maryland has some of the highest cigarette taxes in the nation, and our legislators should not seek to drive even more consumers to buy cigarettes out of state. The price of this tax increase is just too high.
Marc Kilmer is a senior fellow at the Maryland Public Policy Institute. His e-mail is firstname.lastname@example.org.