Revenue smoke signals

Lawmakers rely on taxes with less political opposition

THE BATTLE OVER transportation funding on Beacon Hill came down to how much to raise and how to raise it.

Gov. Deval Patrick pushed for more than $1 billion in new transportation funds, financed primarily with a hike in the broad-based state income tax as well as a series of smaller measures. The Legislature opted for $500 million in new revenues, funded with revenues from new or increased taxes on products that tend to hit much narrower political constituencies.

The largest chunks of the Legislature’s $500 million tax proposal are generated by eliminating the exemption for custom software modifications (raising $150 million), increasing the cigarette tax by $1 ($144 million), and boosting the state gas tax by 3 cents a gallon ($95 million). The remaining $100-plus million comes from various corporate taxes and other initiatives. Revenue estimates are based on the remaining 11 months of collection this fiscal year, according to the Massachusetts Budget and Policy Center.

Patrick’s initial budget proposed a 1-percent increase in the income tax—bringing in more than $1.1 billion in revenue—and a decrease in the sales tax, both of which were rejected by legislators. The governor also recommended several smaller tax hikes on cigarettes, custom software modifications, corporate taxes, and other measures, in addition to indexing the gas tax for inflation.

Michael Widmer, president of the Massachusetts Taxpayers Foundation, said the cigarette tax is a go-to tax on Beacon Hill because there is very little political opposition. He said there is no cigarette industry in the state and Massachusetts has relatively few smokers compared to other states, in part because cigarette taxes have made smoking so expensive. With the new cigarette tax increase, a pack of Marlboros is expected to cost $9.50, or nearly 50 cents a smoke.

The state excise tax on cigarettes has held steady since 2008, when it was raised $1 to $2.51. According to the state Department of Revenue, the 2008 increase led to an additional $143 million of revenue. Cigarette tax revenue has held fairly steady since the last tax hike, but the Department of Revenue estimates a slight decrease from $554 million to $533 million between the past two fiscal years. The new $1 increase will make the state’s $3.51 tax on cigarettes the second-highest after New York.

Health benefits make the proposal a “twofer,” said Noah Berger, president of the Massachusetts Budget and Policy Center. The number of packs bought decreased from 278 million to 225 million after the 2008 tax hike. “As public health policy, [the cigarette tax] is extremely good,” said Berger. “There is strong evidence it reduces smoking rates, in particular among young people.” In turn, this leads to long-term savings for the Commonwealth since fewer smokers mean fewer smoking-related diseases.

Widmer said a higher cigarette tax is not a long-term solution to the state’s money issues. “Fundamentally, the cigarette tax is never going to raise enough revenue to deal with the state’s fiscal problems,” he said. “It kind of becomes a band-aid, if you will. The amount of revenue [raised from a cigarette tax] pales next to an increase in a broad-based tax, such as income or sales tax.”

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Berger added that the cigarette tax is regressive, only works as part of a package, and is likely a declining revenue source. However, if raising the tax high enough would ultimately convince Mass. residents to stop smoking, the public health benefits would be worthwhile. “It’d be a nice problem to look forward to,” Berger said.

The budget’s tax package also includes a 3 cent-per-gallon increase in the gas tax, which, along with the cigarette tax, is meant to primarily fund improvements for the state’s transportation system. However, Widmer said the revenue likely won’t be used to fix transit woes. “Business taxes or cigarette taxes are going to be siphoned off for general operating purposes over time and will not go toward transportation,” he said. “That’s been the practice over time.”