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South Carolina Cigarette Tax Won't Supply Projected Revenue

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The South Carolina Legislature voted to override the Governor’s veto, and raised the state’s cigarette tax by more than 700% to 57 cents per pack.  The maneuver is touted as a way to reduce smoking, particularly among youth, and as a major new revenue source for the state government.  Unfortunately, it cannot do both effectively, and as such, it is more likely to burden the state than aid its struggling finances.

The South Carolina government has made a fatal mistake.  They’ve already allocated $136,000,000 in supposed cigarette tax revenues for FY2010, but the new tax will likely fall far short of that projection.  Given the FY2009 sales of 380.8 million packs and an implementation date of July 1, to arrive at $136 million, the state must assume total sales will rise 11.6% to 425 million packs.  In reality, research conducted by the Campaign for Tobacco Free Kids suggests a 10% increase in per-pack cost will lead to a 4% decline in overall consumption (youth and adult).  If their research is correct, then total sales volume could be as low as 370.7 million packs, and total sales are unlikely to exceed 413.8 million packs.  Based solely on the decline in consumption (an effect the state legislature has acknowledged and even touted) South Carolina will be faced with a net shortfall of 3.6 to 17.4 million dollars.  The shortfall will likely widen after 2010.

Secondly, the $136 million figure assumes consumers are ignorant of the impending price changes.  The date of implementation is public.  Smokers in South Carolina know that cigarettes will cost significantly more on July 1, 2010 than they did on July 30, 2010.  Not only has South Carolina foolishly assumed the total consumption will remain the same, they’ve also assumed that month-to-month consumption will be unaffected.  But consumers, already stretched thin by the Obama economy, will likely hoard cigarettes before the price increase to offset the increased price in the later months of the year.  In other words, cigarette consumption in FY2010 is likely to be concentrated in the earlier months to take advantage of the lower taxes.  That means fewer packs will be sold in the later (high tax) months at the end of the year further widening the shortfall.

Then, there are the border cities.  South Carolina currently enjoys tax revenue from North Carolina and Georgia smokers who live close to the state’s borders.  Raising the tax to 57 cents will eliminate most of these customers.  While cigarettes may remain slightly cheaper in South Carolina than North Carolina (even though the state will have higher taxes) they will suddenly become more affordable to purchase in Georgia than South Carolina.  The loss of incentive means no more North Carolina purchases, and many residents on South Carolina’s southern border may opt to drive across the state line to get their nicotine fix.  It all adds up to an even further reduction in total sales for South Carolina and an even greater shortfall.

Although total tax revenue to the state may increase as a result of the increased cigarette tax, it will certainly not reach the legislature’s lofty projection.  This wouldn’t be a problem if the state hadn’t already allocated the projected revenue.  Instead of cutting around 10% from South Carolina’s estimated $1,200,000,000 budget deficit, the bill has the net effect of increasing the deficit as legislators will be left trying to secure the tobacco shortfall in order to fulfill their funding pledges.  The state would have been much better off waiting a year to analyze the real effect of the tax increase on state revenues so they could budget realistically.  Unfortunately, realistic budgets are less effective at propelling political agendas.

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