Seeking to deal with a projected $1.4 billion deficit, the Michigan Legislature has passed and the governor has signed a bill to raise the cigarette tax by 75 cents, from $1.25 a pack to $2 a pack starting July 1. The tax hike should have gone up in smoke.
The taxing and spending plans will draw down the rainy day fund, stalling ongoing efforts to lower the Single Business Tax, a job-killing measure unique to Michigan. What Lawrence Reed argued two years ago is true today: Michigan can’t afford to postpone cutting taxes to promote economic growth.
Not only is the tobacco tax bill bad policy on the taxing side, it could also lead to more blunders on the spending side. Senate Majority Leader Ken Sikkema suggested during debate to tie the tax increase to greater state funding for the "Life Sciences Corridor." That example of industrial policy, in which the state picks winners and lowers, should not be rewarded with more money. It should be shut down.
So what’s wrong with increasing taxes on cigarettes? One lobbyist cynically, said "Since 75 percent of Michigan residents do not smoke, most people will not be affected." That’s a great line, but it simply isn’t true. Among other things, making Michigan the second highest-taxed state in the nation could cause the 5,000 jobs to disappear. It would also encourage smokers to shop in neighboring states. In Ohio, for example, the tax is 55 cents a pack. High taxes could also open the way for criminals – even terrorists – to profit from smuggling cigarettes from lightly-taxed states.
A permanent cigarette tax increase would add $200 million each year to support a bloated state budget. As the Mackinac Center has already shown, the state can close the projected deficit without a tax increase by eliminating unnecessary spending and selling select state assets. The ideas could save the state over $1.6 billion in general fund spending--enough to close the gap (and then some) without inflicting the damage of a tax increase.
Much is made of the desire to get an extra $54 million for state aid to K-12 schools. That works out to $30 per pupil. That’s a minimal amount per student, money that could be found through increased efficiencies such as contracting out more noninstructional services and asking teachers to join the rest of the workforce in paying more for their own health insurance costs.
Finally, the legislature is missing an opportunity to promote health – not by raising tobacco taxes, but by actually lowering them. The new law also raises taxes on smokeless tobacco. Anyone who wants to promote health through the tax code should lower, not raise, taxes on smokeless tobacco. While no tobacco product is risk-free, smokeless products are estimated, in a study published by the British Royal College of Physicians, to be at least 10 times safer than cigarettes.
By failing to cut unneeded government spending, the legislature has ended up with a plan that harms the economy, does nothing to promote an effective government, increases support for an economic boondoggle, and fails to take advantage of an opportunity to promote healthier alternatives.
John R. LaPlante is an adjunct scholar with the Mackinac Center for Public Policy and the Taxpayers League of Minnesota. He has written for the Mackinac Center on contracting out state-owned ski resorts, he contributed to the Mackinac Center’s study on Balancing Michigan’s State Budget, and he has written for FindLaw.com, the leading provider of legal information on the World Wide Web. Cigarette tax legislation can be tracked at MichiganLegislature.org and at MichiganVotes.org.