Rise in Tax, Drop in Cigarette Sales May Squeeze Md.'s Expected Revenue

There is little evidence, however, to suggest that surrounding jurisdictions are reaping a windfall in tax revenue from Maryland smokers.

Collections in the District show no consistent trend, and tax analysts in Virginia and Delaware reported no upticks in their tobacco tax collections since Maryland's rate was raised. The tobacco tax rate in Virginia is 30 cents a pack, though some jurisdictions tack on as much as an additional 70 cents. Delaware's rate is $1.15 a pack.

"If there's a bump in collections, it's hard to see the bump," said Patrick Carter, Delaware's director of revenue.

Maryland law seeks to limit out-of-state cigarette purchases. It is illegal for Maryland residents to be in possession of more than two packs of cigarettes lacking stamps showing that taxes were paid in the state.

"We're not crashing into people's homes to see if they've purchased a pack or two more than they should out of the state, but we have a very aggressive effort concentrated on larger smugglers," said Joseph Shapiro, a spokesman for the Maryland Comptroller's Office.

His boss, Comptroller Peter Franchot (D), said he suspects the drop-off in cigarette consumption is being driven largely by consumer choices in a tight economy.

"We're seeing a softening of retail purchases everywhere, on everything from gasoline to milk," Franchot said.

Preliminary figures kept by his office show a drop-off in tax stamps on cigarette packs at the wholesale level from about 132.2 million in the first half of last year to about 99.5 million in the first half of this year.

The nearly 25 percent decline exceeds a 17 percent drop-off that fiscal analysts in Maryland had predicted when the tax increase was approved last year.

Although the higher tax rate has increased tobacco tax collections significantly, the larger-than-expected decline in sales means the state could be short of its budgeted revenue by $40 million to $60 million this year if current trends continue. The state had been projecting about $440 million in revenue from the tobacco tax this year.

William R. Phelps, manager of media affairs for Philip Morris USA, said he is not surprised that tax collections are not meeting expectations in Maryland. During the special session, his company distributed research showing that revenue met projections in only eight of 40 states that raised tobacco taxes between 2003 and 2005.

"We've seen repeatedly that predicting how much revenue a cigarette tax is going to produce can be very difficult," Phelps said.

Staff writer Hamil R. Harris contributed to this report.