When the D.C. City Council raised the cigarette tax by 50 cents, city officials claimed it would generate a windfall of additional tax revenue for government coffers. However, in a letter to Mayor Adrian Fenty last month, D.C. Chief Financial Officer Natwar Gandhi informed him that the council’s calculations were $15 million off.
New revenue projections released in February show cigarette tax revenue coming in below initial projections by more than 30 percent. Not only did the tax increase miss the projected revenue mark, it turns out the increase actually resulted in a loss of revenue for the District, coming in at approximately $7 million below pre-increase levels.
While the decline in revenue came much to the shock and chagrin of D.C. Council members, it comes as no surprise to those familiar with tobacco tax increases and their implications. The same thing happened when New Jersey raised its cigarette tax by 17.5 cents in 2007. That tax increase brought in $52 million less than Garden State lawmakers expected and $22 million less than was generated by the pre-increase rate.
In fact, of the 57 tobacco tax increases enacted by states between 2003 and 2008, only 16 met initial revenue projections.
Gandhi’s new revenue figures, as well as his assertion that “future increases in the tax rate will likely generate less revenue rather than more,” make it clear that D.C.’s tobacco tax has moved beyond the midpoint of the Laffer Curve. Based on this, the answer for D.C. Council members is simple — cut the cigarette tax.
After all, the last five cuts to the federal capital gains tax yielded additional revenue to the government.
However, the injection of revenue from a cigarette tax cut should not simply be tossed back into the general fund only to facilitate the council’s overspending problem. Instead it should be put toward a good cause, and what better cause than improving the health of children in D.C. schools?
Childhood obesity is a serious national problem, with one of every three kids in the United States classified as overweight or obese. The problem is so great that Michelle Obama has made reducing childhood obesity her top policy initiative as first lady.
Nowhere is this problem more dire than right here in D.C., home to the highest rate of overweight children ages 10 to 17. That’s why the additional revenue that would result from a cigarette tax cut should be allocated for programs that fight childhood obesity and promote healthy eating habits in D.C. schools.
As it happens, D.C. Councilmember Mary Cheh recently introduced legislation, the Healthy Schools Act, that aims to accomplish this very goal. Cheh’s bill seeks to make school meals healthier, increase availability of fresh fruits and vegetables, and improve school nurse programs.
Last year’s cigarette tax increase was part of a package meant to close a budget deficit that was $40 million after $300 million in cuts. In fact, D.C. is $200 million in the hole for just the current budget alone, has a $500 million shortfall looming in fiscal year 2011, and is coming dangerously close to the 12 percent debt cap.
Reducing the cigarette tax is the best way to generate revenue for the D.C. Council’s healthy schools initiative without further burdening already heavily taxed Washingtonians.
The D.C. Council will hold a hearing on the Healthy Schools Act on March 26. If Cheh and her colleagues are serious about passing this legislation, they must earnestly consider reducing the cigarette tax as a means to fund their noble endeavor.
Patrick Gleason is director of state affairs at Americans for Tax Reform.
