Colorado Cigarette Tax Generates Less Revenue than Promised

DENVER, COLORADO. FreedomWorks has an important message for state governments when balancing their budgets: responsible spending practices—- not tax hikes—- are the answer to state fiscal health. A case in point in Colorado: January numbers show that the newly enacted tax increase on cigarettes will not generate as much revenue as expected.

The Colorado tax increase was approved by voters last year and took effect at the beginning of 2005. In order to pass the increase, proponents promised that the measure would raise $175 million earmarked primarily for expanding Medicaid. However, the tax hike only produced $11.1 million in January, which is 24 percent below the monthly average needed to generate the revenue promised.

FreedomWorks is unsurprised by this result because tax increases change incentives, causing them to bring in less income than expected. Residents living along three of Colorado’s four borders will choose to buy cigarettes in Kansas, Nebraska, Utah and Wyoming—- all states with lower state tobacco taxes, at Colorado’s Indian Reservations, and over the Internet. This hurts Colorado convenience stores and other businesses that sell cigarettes as they lose business to neighboring states and other sources because of this tax hike.

While all tax increases are bad policy, higher cigarette taxes are highly regressive, costing lower-income citizens a much higher proportion of their income. A significant portion of the multi-million dollar burden from this tax hike will fall on Colorado’s poorer families.

Unfortunately, legislators in Denver continue to look for new ways to tax Colorado citizens. Instead of cutting spending, Democratic House Speaker Andrew Romanoff is proposing changes to the Taxpayer’s Bill of Rights (TABOR) that would lift spending restraints and cancel many promised tax refunds to citizens. Even Republican Governor Bill Owens wants to alter TABOR and reduce tax refunds by $500 million. That’s the wrong approach: Colorado needs to look to spending control, not the false illusion of higher taxes, to keep its fiscal house in order.