Texas May Increase Cigarette Excise Tax Rate

Ronald L. Scott

On June 5, 2002, The Austin American-Statesman reported that a group of Texas legislators would like to raise the Texas state excise tax by $1 and use the additional revenue to offset unexpected costs in Medicaid and the Children’s Health Insurance Program.
Texas charges 41 cents per pack excise taxes on cigarettes sold within the state. This is in the middle range of state excise taxes. See Centers for Disease Control (CDC), Cigarette Excise Taxes, 2001, 4th Quarter at http://www2.cdc.gov/nccdphp/osh/state/report_index.htm.  Texas first charged an excise tax on cigarettes in 1931.  The rate was last changed July 1, 1990—from 26 cents to 41 cents. See American Lung Association, State Legislated Actions on Tobacco Issues (Dec. 31, 1999).

More than twenty states and some cities are considering raising excise taxes on cigarettes, and some have already done so.  In the fourth quarter of 2001, state cigarette excise taxes ranged from a low of 2.5 cents per pack in Virginia to $1.11 in New York State, and only five states charged $1 or more.  See id. But the State of Washington recently increased the state’s tax to $1.425, a proposal that won approval of voters last November.  Cigarettes will now sell in Washington State for about $5 a pack.  The states of New Jersey and New York recently raised their tax rate to $1.50.  At least eight states now charge $1 or more in excise taxes.  New York City has significantly increased city taxes on cigarettes, imposing a city tax of $1.50. The retail price of cigarettes in New York City is now more than $7 per pack.  Also, last year, the federal excise tax was increased by 5 cents to 39 cents.

A Texas study found that Texans overwhelmingly support increased tobacco taxes to generate needed state revenues compared to other types of tax increases. See Why Are States Raising Cigarette Taxes (posted 02/22/02).

The Surgeon General’s 2000 report on tobacco use identified the following approaches used to determine the appropriate level of cigarette taxes:

See U.S. Dept. of Health and Human Services, Reducing Tobacco Use, A Report of the Surgeon General at pages 337-359, DHHS, CDC Office on Smoking and Health (2000).

Given the disparities in the cost of cigarettes in different states, the Surgeon General’s report notes the incentives to: (1) smuggle cigarettes either individually or on a larger scale; (2) purchase cigarettes from tax-free sources such as the Internet or American Indian reservations; and (3) illegally divert cigarettes by forging tax stamps. Federal law prohibits organized smuggling and diversion of cigarettes not bearing the tax stamp of the state where the cigarettes were originally sold and has proven effective, but casual smuggling remains a problem.  See id. at page 340, citing Federal Trafficking in Contraband Cigarettes Act of 1978, Public Law 95-575.