The state of Tennessee is finding out what many other states already know – increasing excise taxes provides diminishing returns. Based on the revenue received during the first month of the new cigarette tax, the state will fall $168 million short of its $230 million expectations of annual income. The cigarette tax was increased by 48 percent, from 42 cents to 62 cents per pack effective July 1, 2007. The projected income was supposed to help pay for education reform.
There is a great disconnect between the social and economic goals of raising excise taxes on cigarettes. The government wants to reduce smoking, which occurs when taxes increase; yet legislators usually plan to spend absurdly miscalculated amounts of money on new programs. Doing that requires more smokers, not fewer. For example, the federal government thinks it can pay for the $35 billion expansion in the State Children’s Health Insurance Program by raising cigarette taxes; the Heritage Foundation calculated that it will require 22.4 million new smokers over the next 10 years to raise sufficient funds for that purpose. Since that will not happen, the money will be raised through some other type of tax.
But Tennessee is not giving up easily. In an effort to get back some of the revenue shortfall, the state is flooding its borders with monitoring agents, who will cross over into markets in neighboring states to look for people buying cigarettes in volume, then departing in a vehicle with Tennessee license tags. The monitoring agents will then call an arresting agent, who will attempt to stop the car when it enters Tennessee. Aside from the questions of constitutionality and interstate commerce, there is the matter of the best use of police resources in the state.
From 2004 to 2006, the murder rate in Tennessee rose 13.3 percent, drug and narcotic violations went up 5.6 percent, and robbery went up 25.2 percent. While the overall increase in “Group A