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The Cigarette Tax: Balancing the Budget on the Backs of Smokers By Robert E. Martin Ironically, in a session that lasted until the early morning hours on July 4th, the Michigan House agreed to resolve the state's budget deficit by increasing the cigarette tax and using most of the rainy day fund. The House ended their marathon session by voting 56-47 to raise the tax on cigarettes by 50 cents a pack with Senate approval following shortly thereafter. The total state tax on cigarettes is now $1.25 per pack. The impetus that moved this regressive tax through the Michigan legislature rested in part upon threats by Gov. John Engler and Republican leaders that control both the House & Senate to cut $150 million for the upcoming fiscal year. By pushing for elimination of the Single Business Tax over the years, Republican leaders have in essence depleted the entire rainy day fund and approved corporate socialism for a privileged few. This was achieved by giving hundreds of millions of dollars statewide to only 17 of the top wealthiest businesses in Michigan that pay 75 percent of the Single Business Tax. Similarly, if the SBT tax rate were applied to a person earning $50,000 per year, the tax cut would amount to about 96 cents per week - not even enough money to buy a McDonald's Quarter-Pounder. Prior to adoption of the new cigarette tax, Senate Majority Leader Dan DeGrow and House Speaker Rick Johnson submitted a plan that would have reduced the Michigan Council for Arts & Cultural Affairs grants by 50 percent. If this measure had passed, the proposed $11.9 million cut in state arts & culture grants would have resulted in a loss of over $273.7 million in Michigan economic activity and cost approximately 20,000 jobs. The cigarette tax hike is expected to generate $107 million a year for the school aid fund, which is to be used for the first time in the 2003-2004 fiscal year, and about $150 million for the general fund in the budget year that begins Oct. 1st. Michigan schools currently receive at least $6,700 in state funds for each of their students. But does it make sense to rest the fate of our children's future on something that leaders and health professionals both condemn, criticize, and discourage such as smoking? Obviously, while this regressive tax may initially mean more revenue, it may also keep people from smoking and thus jeopardize the fund once again, especially with 44,900 adults smokers anticipated to quit because of the increase. This latest increase makes Michigan's cigarette tax the third highest in the nation behind New York's $1.50 tax and Washington state's $1.42. 20 cents of the tax will go to the state's school budget, 22 cents into the general fund, 4 cents on the Medicaid program, and 1 cent to a Wayne County health care program for low-income families. Additionally, the legislature agreed to withdraw $355 million from the Budget Stabilization Fund to help resolve a $492 million shortfall in the general fund for the current fiscal year. The school aid fund budget for the next fiscal year would receive $350 million from the rainy day fund, according to the bill. The legislation also allows the state budget director to withdraw even more money from the rainy day fund if it's needed to balance the budget, which is required by the Michigan Constitution. If the rainy day fund were to drop below $250 million by the end of this fiscal year, it would prevent the 0.1 percent single business tax cut scheduled for Jan. 1, 2003. According to Mitchell Bean, director of the non-partisan House Fiscal Agency, the rainy day fund would be left with between $33 million -$35 million after the 2002-2003 fiscal year if the budget director takes out only the amount specified in the bill. Amazingly, to placate the business community even more, the House voted to speed up the phase out of the single business tax. Instead of phasing out the tax by 0.1 percent a year until it disappears in 2021, the House unanimously approved legislation to phase out the tax over the same rate until 2009 and then eliminate it all by the start of 2010. The bill also exempts more businesses from paying the tax now, raising the threshold of companies that pay the tax from $250,000 to $350,000 in gross receipts. This move is expected to exempt 13,000 additional businesses in Michigan from paying the tax. As Rep. A.T. Frank, the ranking Democrat on the House Appropriations Committee noted in The Detroit Free Press, "My fear is that the cigarette tax is not going to solve the budget issue in this state, and we could be postponing the reality that we'll have to face in 2004. I'm not going to support some scheme that allows Engler to get out of Dodge and leave the next administration and the next Legislature with a huge mess." But most discouraging is the hypocrisy of leaders that balance budgets on the backs of the disadvantaged for the benefit of the privileged few, forgetting the lessons of history in the process. Without doubt, one 'new business' that will grow by leaps and bounds is that of cigarette smuggling, which we can learn something about from our neighbor to the north, Canada. In 1994, Canada threw in the towel after years of futile attempts to crush the illegal trade in cigarettes caused by confiscatory taxes that priced Canadian smokes at $33.00 a carton, more than 10 dollars less than Michigan's new prices! Prime Minister Jean Chretien noted at the time that 2 of every 3 cigarettes smoked in the province of Quebec were contraband, and the central government was losing an estimated $4.5 billion in revenue. Back when Michigan tripled its cigarette tax from 25 cents to 75 cents back in 1994, smuggling soared from Indiana and Illinois, with some officials saying it cost Michigan $17 million a year in lost tax revenue. Let's face it. The bigger the tax the more the incentive is to smuggle and take greater risks. And if we've learned anything from the futile war on drugs it is that the bigger a tax is the more profitable an illicit trade becomes.
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