Warning: “Sin Taxes” May Be Hazardous to the State

Cascade Commentary


Oregon’s cigarette tax has become an “essential” source of funding for government programs and services completely unrelated to smoking, a prime example of why a “sin tax” is bad public policy.

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On September 25, 2006, during his campaign for reelection, Governor Ted Kulongoski proposed raising Oregon’s cigarette tax by nearly 85 cents (bringing the total tax per pack to $2.025) to help expand health coverage for uninsured children under the Oregon Health Plan. While some politicians find this source of revenue appealing, a “moral hazard” is always inevitable when “sin taxes” are used to fund state services.

So-called “sin taxes” are a moral hazard for government because they begin as an attempt to discourage “undesirable” behavior and quickly end up being a “necessary” source of funding for unrelated government programs and services. Oregon’s $1.18 per pack cigarette tax is a prime example. Using a cigarette tax to combat smoking and to raise revenue for state programs and services, as the State of Oregon claims to be attempting, is not possible. These are two mutually exclusive goals: For one to succeed, the other must fail.

“‘[S]in taxes’ are a moral hazard for the government because they begin as an attempt to discourage ‘undesirable’ behavior and quickly end up being a ‘necessary’ source of funding for unrelated government programs and services.”

Many Oregonians probably assume that cigarette taxes recoup state health care costs generated by smoking-related illnesses and fund anti-smoking and smoking cessation programs. In reality, the 20% of the population who smoke cigarettes are both disproportionately and regressively taxed to fund services completely unrelated to smoking.

Many politicians justify Oregon’s cigarette tax by claiming that each pack of cigarettes will end up generating several dollars’ worth of future unfunded state health care costs. However, estimates vary, and quotes have ranged from four dollars per pack to as much as $12.70. Not only are the numbers inconsistent, but they are misleading. Many negative economic impacts of smoking are actually borne by smokers themselves, not by the government. Such studies fail to take into account many factors which nearly cancel out the future cost of a pack of cigarettes to the state.

Whatever future costs may or may not be borne by the state, Oregon smokers are not simply being forced to pay for their own health care. $55 million of cigarette tax revenue in 2005 paid for services such as education, law enforcement and light rail. These services have nothing to do with smoking or smokers’ health care.

Due to the demographics of the smoking population, smokers are regressively taxed to fund these general services. Those living below the poverty line are about 50% more likely to smoke than those living above it. Therefore, Oregon’s poorest citizens are more likely than other Oregonians to pay the tax.

“While politicians maintain they would like to see smokingeradicated, the truth is that if everyone in Oregon were to quit smoking, the state would lose a steady stream of revenue and be left with a yearly $288 million budget gap.”

While politicians maintain they would like to see smoking eradicated, the truth is that if everyone in Oregon were to quit smoking, the state would lose a steady stream of revenue and be left with a yearly $288 million budget gap. When asked to comment on a proposed cigarette tax increase to fill budget gaps in 2002, then-gubernatorialcandidate Ted Kulongoski remarked that such an increase would be ineffective because it would only discourage cigarette consumption. Four years later, it appears he has changed his mind.

By using funds from cigarette taxes and the tobacco companies’ Master Settlement Agreement (MSA) to pay for health care, education and law enforcement, Oregon has created a tremendous moral hazard. With so many essential state programs dependent on cigarette taxes, it has become in the state’s interest to keep smokers smoking. By issuing bonds backed by future payments from the MSA, the State of Oregon must see to it that people are smoking years down the road.

Perhaps it is not surprising, then, that one budget area receiving almost no cigarette revenues is smoking prevention. Of the $288 million Oregon received from cigarettes in 2005, only $3.5 million funded anti-smoking programs. This is only 16 percent of what the Centers for Disease Control recommends for an anti-smoking program to be effective.

If Oregon wants to recoup losses incurred by treating smoking-related illnesses and to fully fund a smoking prevention program, a 15-cent tax per pack (in conjunction with continued MSA payments) would more than suffice. Yet, cigarette taxes remain eight times higher and growing, while smoking prevention and cessation programs remain a low priority. If cigarette taxes do not fund programs legitimately linked to the true public costs of smoking, they should be abolished, rather than expanded to fund more and more aspects of a ballooning state budget.

Read the full text of Tobacco Revenues Prove Addictive, and other publications of the Oregon Economic Opportunity Project, online at www.cascadepolicy.org.

Bruce Smith was a 2005 summer research associate at Cascade Policy Institute, a think tank based in Portland, Oregon. A student at William and Mary College, he is the author of Tobacco Revenues Prove Addictive, a publication of Cascade’s Oregon Economic Opportunity Project. The full text is available online at www.cascadepolicy.org. Kathryn Hickok is Publications Director at Cascade.

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