During a recent debate over a proposed cigarette tax increase, South Carolina legislators briefly considered a unique proposal to index the amount of the tax to the inflation rate of medical costs; the logic being that without indexing the tax, the revenues it raised would soon fall short (as a result of inflation) of the amounts needed to maintain the health care expansion to which it would be dedicated. The provision to index the tax has already been removed from the bill, but it nonetheless continues to provide an interesting context in which to discuss the cigarette tax. With the cigarette tax being on the agenda of so many states in just the past few months, including Maine, Massachusetts, New Hampshire, New York, North Carolina, and the District of Columbia, to name a few, any new perspective with which to view this issue is certainly useful.
Though cigarette tax increases are often packaged as attempts to curb smoking, prevent teen addiction, or offset the various costs that smoking imposes on society, many policymakers either privately or publicly view the tax primarily as a method for obtaining revenue with which to enact or expand a favored program. The problem is that the stream of funding produced by cigarette taxes always falls short over time as inflation erodes the value of tax collected on each pack sold. Indexing the tax to inflation is one way to begin to remedy this problem.
The South Carolina proposal was especially interesting in that it explicitly tied the revenues raised to the cost of the program it would fund (health care). The main problem with South Carolina's approach is that smoking rates are generally on the decline -- meaning the tax base upon which this revenue source depends is shrinking. Indexing does nothing to solve this problem, and therefore should not serve as an excuse for policymakers to increase their state's reliance on this regressive and unsustainable revenue source.
As an interesting aside, indexing the cigarette tax to inflation does make sense for states whose primary goal in taxing cigarettes is to curb smoking. As inflation erodes the true value of the tax levied on each pack, the deterrent power of that tax is reduced. Indexing the tax is the most reliable way to ensure that a consistent amount of tax is collected.