Will SCHIP sink the states?

The New York Times ran a timely article this week about states’ reliance on tobacco taxes:

Florida’s proposed withdrawal is perhaps the starkest example of the growing addiction to tobacco-related money. Since 2001, cigarette tax increases and diversions of tobacco settlement payouts have become a favorite solution for budget crises nationwide. But as the current recession deepens, disputes about how the money should be spent have intensified, even as tobacco money’s potency has been weakened by past use.

“While states have viewed tobacco as the first ‘go to’ tax for the better part of a decade, it won’t be anywhere near enough,” said Donald J. Boyd, a senior fellow at the Rockefeller Institute of Government, a research arm of the State University of New York. “Increases in other taxes — yet to be proposed and enacted — will be far larger than in the last recession, and the relative importance of tobacco tax increases will be less.”

At least 17 states, including California and New York, have already sold bonds based on future tobacco settlement payouts and spent some or all of the money before they have it, according to the National Conference of State Legislatures. Moreover, cigarette taxes are also less lucrative than they were a decade ago because cigarette sales in the United States have dropped by more than 20 percent.

Nonetheless, two weeks into the year, conservative, tobacco-friendly states like Kentucky, Georgia and Mississippi are considering sizable tax increases on cigarettes, while some with liberal Democratic governors — including Michigan, Ohio and New Mexico — are looking at ways to redirect tobacco settlement money to close budget gaps or for economic stimulus packages.

One unintended consequence of SCHIP will be its effect on state budgets. It’s a money grab for the federal government, but by more than doubling the tax on cigarettes it’s going to reduce consumption and therefore tax revenues at the state level. With many state budgets already in crisis, that could be a real problem. Smokers’ addiction to tobacco is nothing compared to the states’. As this golden goose gives out, non-smokers may see their own favorite products targeted next.

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