TRENTON, NJ – While New Jersey Gov. Jon Corzine claims that his plan to increase the state’s cigarette tax by 12.5 cents per pack would raise $26 million annually, the Center for Policy Research of New Jersey claims that the hike would actually cost the state money.
“The proposed cigarette excise tax will hurt, not help the state's attempts to raise additional revenue and will further penalize small business owners by encouraging adult smokers to seek lower-cost, out-of-state purchasing alternatives," said Gregg Edwards, president of the Center for Policy. "If the increase is passed, the state will likely need to raise taxes elsewhere or resort to cutting funding to state programs."
A study conducted by Balvor determined that the proposed increase of 12.5 cents per pack in the state’s cigarette excise tax is likely lead to a loss of state revenue of nearly $11.7 million during FY10, which only accounts for the impact directly related to the sale of cigarettes in the state.
Additionally, when the ancillary sales that accompany cigarette purchases are included, New Jersey would likely realize an additional $3.3million sales tax loss. So, the total effect of the proposed cigarette tax hike would be approximately $15 million.
A primary factor contributing to the projected revenue decline for retailers and the state is the expanding gaps between the prices paid for a pack of cigarettes in New Jersey and those of neighboring Delaware and Pennsylvania. A New Jersey smoker buying cigarettes in Delaware or Pennsylvania would save approximately $2.09 and $1.53 per pack, respectively.
Based on the average value of a transaction involving cigarettes, New Jersey retailers are at risk of losing approximately $185 million in retail sales, which translates to roughly $40 million in lost gross profits during the first year. New Jersey convenience stores alone employ more than 28,000 workers, with nearly 72 percent of those convenience stores operated by owners who run 10 or less stores.
New Jersey’s sky rocketing cigarette prices have encouraged the development of a robust black market. Black-market cigarettes provide a low-risk way for organized crime and street gangs to finance their criminal activities. Consequently, vital law enforcement resources must be used to enforce tax policy.
“In addition to the crippling blow dealt to retailers, state lawmakers need to stop and think about how this tax will increase the already growing black market for cigarettes and the fact that underage buyers will be drawn to ‘street corner vendors’ to fulfill their cigarette purchases,” said Edwards. “We are not filling a budget gap as we are led to believe, we are increasing the likelihood of illegal sales on the streets and on the Internet — what are they thinking?”
Ironically, if the state wants to stem a further erosion of tax revenues, it actually has a better chance of achieving that goal by maintaining the current cigarette tax rate. That would allow New Jersey to take advantage of narrowing price gaps with bordering states, according to the study.