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

By John Wagner
Washington Post Staff Writer
Thursday, July 31, 2008

Cigarette sales have dropped by nearly 25 percent in Maryland since the state's tobacco tax doubled in January, as sticker shock apparently has curtailed some residents' smoking and sent others across the border for better deals.

Maryland lawmakers voted last fall to raise the tax to $2 a pack to help bridge a budget shortfall and expand subsidized health care. Fiscal analysts predicted that the new rate, the sixth highest in the nation, would cause cigarette sales to drop off, following a pattern with past increases.

But the decline during the first six months of the year significantly exceeded their projections, exacerbating Maryland's budget problems and prompting speculation about what other factors might be at play. The tight economy, for example, has almost certainly added incentive for some to kick the habit.

Still, "it's unlikely that this is exclusively because of an abrupt cessation of smoking on the part of Marylanders," said House Majority Leader Kumar P. Barve (D-Montgomery), who suggested that people are probably picking up extra packs of cigarettes when they are in the District, Virginia or Delaware, all of which have lower tax rates.

The District's levy is scheduled to increase from $1 to $2 in October, matching Maryland's.

To the extent people are smoking less because of Maryland's higher tax rate, "that's a good thing," Barve said. "We're happy to collect less revenue for that reason."

His view is echoed by health advocates, who have championed higher taxes on cigarettes in Maryland and other states to reduce teen smoking in particular. The Campaign for Tobacco-Free Kids says numerous studies in the past decade suggest that every 10 percent increase in the price of cigarettes reduces youth smoking by about 7 percent and overall cigarette consumption by about 4 percent.

"This is a wonderful public health victory for Maryland," said Vincent DeMarco, president of the Maryland Citizens' Health Initiative, adding that a decline in smokers will save taxpayers millions in state health-care costs.

Smoking in the Free State has become an expensive vice. Once tobacco and sales taxes are factored in, it is nearly impossible to buy a pack of 20 cigarettes in Maryland for less than $5. Most brands will set you back at least $6 a pack, and the higher-end labels cost more.

Legislative analysts say they are looking at the degree to which Marylanders are crossing borders to buy cheaper cigarettes. It seems to be happening to some extent.

On a recent afternoon, two service stations along South Dakota Avenue NE in the District were packed with vehicles with Maryland tags, many belonging to commuters heading to Maryland by Route 50 or the Baltimore-Washington Parkway.

"The tax is not going to stop people from buying cigarettes," said Mike Brockington, a 40-year-old Prince George's County resident, adding that he was purchasing cigarettes in the District because of Maryland's tax increase.

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.

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