Washington experiences lower tax revenue after cigarette tax hike

The Laffer Curve brought to you in Technicolor™. Even though Washington, D.C. is one of the few cities in the country where employment growth is happening, the city has experienced a severe drop in cigarette excise tax revenue after increasing the tax 25 percent.

There has been a large drop in the volume of cigarettes purchased in the nation’s capital. That said, the inside-the-beltway crowd is most certainly under more stress than ever so I don’t think they are quitting. Even city tax managers are admitting residents are heading across the border into Maryland and Virginia where the cost to keep the nicotine flowing is cheaper.

Hat tip to Dan Mitchell, writing on Big Government yesterday who points us to a District CFO report released Feb. 24.

Natwar Gandhi, the chief financial officer writes to the mayor and chairman, with my emphasis in bold.

This letter certifies, as of February 2010, revenue estimates for the FY 2010 – 2014 District of Columbia Budget and Financial Plan. The FY 2010 revenue is now estimated to be [$5.16 billion], $17.7 million less than the estimate that was certified in December 2009. …

One of the gap-closing measures for the FY 2010 budget was an increase in the excise tax on cigarettes from $2.00 to $2.50 per pack. The 50 cent increase in the cigarette tax rate was projected to increase revenue but also reduce volume. Collections year-to-date point to a more severe drop in volumes than projected. Anecdotal evidence suggests that Maryland smokers who were purchasing in DC in FY 2008, because the tax rate in the District was less than the tax rate in Maryland, have shifted purchases back to Maryland now that the tax rate in the District is higher. Virginia analyzed the impact of demand when the federal rate went up by $0.61 in April and has been surprised that demand is much stronger than they had projected–raising the possibility that purchasing in DC has moved across the river.  Whatever the actual cause, because of the lower than anticipated collections, the estimate for cigarette tax revenue is revised downwards by $15.4 million in FY 2010 and $15.2 million in FY 2011. Given that cigarette tax rates in neighboring jurisdictions are now lower than that of the District, future increases in the tax rate will likely generate less revenue rather than more.

Exit question. If a significant number of smokers quit, would this be a good thing for the people of the area?

Right now, the lefties want it both ways, they say they want people to quit to improve their health, yet they have relied on sin taxes to increase revenues and fill in budget gaps during the economic downturn.

My guess? Tax revenues declined and the number of smokers in the area remained status quo or increased… a total fail when it comes to liberal tax and health policy.

Bonus video …


1 reply
  1. Dimsdale
    Dimsdale says:

    For a political party that runs on all the baser instincts, they sure lack an understanding of human nature.


    Graham was partly right: who feels like the dumbest Democrat out of a real group of dummies?   The liberals are "Dumb and Dumber" personified.

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