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[ Feature Story]
Anatomy of a Tax Hike
How North Carolina’s cigarette excise tax
rate
went from 5 to 35 cents per pack
by Chris Traczek
For the past several years, whenever a state needs to make a quick buck, they turn to an old reliable: an increase in the cigarette excise tax. That practice has become so prevalent and accepted that even smokers in tobacco-centric states like Virginia and Kentucky have become lighter in the wallet due to hikes in their cigarette taxes.
In fact, after two years of wrangling, in March Kentucky Gov. Ernie Fletcher signed a tax increase that bumped his state’s cigarette tax from 3 cents per pack, which had been the lowest in the nation, to 40 cents per pack, beginning June 1. Then, in October, despite reports in the Louisville Courier-Journal that “cigarette sales plummeted by 10 percent” after June 1, Fletcher said that he may propose another increase come January 2006 when the state’s legislative session reconvenes.
“We’ve got some more room there, I think, to take the cigarette tax higher,” Fletcher said. “And I think you would agree that the deterrent effect that will have and message that sends to individuals is a good message for their health.”
With that said, is anybody safe?
North Carolina, home to R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co., two of the three largest cigarette manufacturers in the United States, was one of the final holdouts with a bargain-basement cigarette tax of 5 cents per pack entering 2005. But even backed by the combined weight of its two influential corporate residents, the state’s smokers were defenseless against the rising tax tide. Let’s take a closer look at how North Carolina’s cigarette tax increased from 5 to 30 cents per pack, with another bump to come in 2006.
The Plan
North Carolina Gov. Mike Easley entered 2005 with a budget plan that included a 35-cent hike in the state’s cigarette tax this year, followed by an additional 50-cent increase in 2007.
He reasoned that “following (2004’s) federal tobacco quota buyout, many state leaders have said it’s time to raise (cigarette taxes) to help pay for smoking-related health care and efforts to cut teen smoking.”
In response, state Senate leaders expressed concern that the proposed tax hike was too high and could put local jobs at risk. Two chief writers of the state’s budget, whose districts include R.J. Reynolds and Lorillard Tobacco, tried to scale back the governor’s hike to a figure of 10 to 15 cents per pack.
At the time, health advocates in the state were pushing for a jump in the cigarette tax to 75 cents per pack.
The Debate
In May, North Carolina state Senators said they were sticking to the plan of raising the cigarette excise tax to 40 cents per pack. After hours of negotiations, Senate leaders reached an agreement on May 3 to raise the state’s cigarette excise tax by 35 cents, with plans to have it approved by May 6.
That was wishful thinking, however, with the debate on just how large the increase should be carrying into the summer.
In early June, budget subcommittee members of the state House agreed on a two-year proposal that did not even contain the Senate-approved cigarette excise tax increase, though the co-chair of the House Appropriations Committee, Rep. Beverly Earle, was hopeful the House would match the Senate’s 35-cent hike.
On June 14, Democrat leaders of the North Carolina House ushered a 25-cent-per-pack increase of the cigarette tax through the state’s Finance Committee. In addition, the House Democratic Caucus was working to reach a consensus on what, if any, cigarette excise tax increase would make it to the House floor for a vote.
On June 16, members of the North Carolina House passed a $17.1-billion budget plan that included the 25-cent per pack increase. The budget plan then headed to the Senate, which was expected to reject most of the provisions passed by the House.
All of these machinations took place under a tight schedule, with the House and Senate needing to reach an agreement by the beginning of the new fiscal year on July 1.
Not surprisingly, the July 1 deadline was not met, so legislators passed a continuing resolution in order to keep the government operating until members could finish work on the proposed state budget plan, with the tax increase a major bone of contention.
 The Resolution
Finally, on Aug. 4, the North Carolina legislature agreed to raise the state’s cigarette tax by 25 cents at the end of the month and another 5 cents per pack by July 2006. Other tobacco products also would be taxed an additional 2 percent to 3 percent. Although House Democrats had said they would allow an increase of no more than 25 cents per pack, they accepted the compromise.
R.J. Reynolds Tobacco Co. officials expressed their displeasure with the tax increase in the company’s home state.
“We’re very disappointed that the governor and the legislature have significantly increased the tax on middle- and lower-income North Carolinians who choose to smoke, and who are already paying the state hundreds of millions of dollars in excise and sales taxes and settlement payments,” said Tommy Payne, a spokesman for Reynolds.
So where does the tax-hike spotlight shine next? Residents of North Carolina can look no further than one state south where neighboring South Carolina now has the nation’s lowest cigarette tax at 7 cents per pack. It’s also a sure bet that since Sept. 1 many North Carolinians have crossed the border looking for cheaper smokes.
The Associated Press, Winston-Salem Journal and NACS Daily contributed to this report. |
