New Jersey’s cigarette tax

Murphy wants to raise New Jersey’s cigarette tax to among highest in nation

By SAM SUTTON

New Jersey Gov. Phil Murphy wants to raise taxes on cigarettes by $1.65 per pack, which would make the Garden State one of the most expensive places in the country for smokers.

The new cigarette tax, which was included in the $40.9 billion state budget proposal Murphy submitted to the Legislature on Tuesday, would increase rates from $2.70 to $4.35 per pack. That would match the amounts charged in New York and Connecticut, which have the highest rates in the country.

Though it went unmentioned in Murphy’s budget address, briefing documents provided by the state’s Department of the Treasury indicate the estimated $218 million in additional funds generated by the tax would help support health-related programs ranging from anti-smoking initiatives to support systems for children with emotional and behavioral needs.

Even so, the proposal might have lost its wind before making it out the gate. State Senate President Steve Sweeney, a budget hawk and Murphy’s biggest Democratic rival in the state, has already said the “cigarette tax is a big problem.”

Pressed by reporters why the new tax would pose a challenge, Sweeney, who’s previously called for an outright ban on vaping products and supported a prohibition of menthol cigarette sales, said he didn’t believe the state’s revenue situation warranted additional taxes, particularly if Murphy wants to pass one of his signature policy initiatives — a higher marginal tax rate on millionaires.

“I’m not — listen, I said I was open to a millionaire’s tax if there was a billion dollars in new funding for [the state‘s underfunded] pension. I don’t think we really need the other taxes, period,” Sweeney said.

While New Jersey policymakers have taken significant steps to reduce the use of tobacco products, including banning most cigarette flavors in 2008 and passing legislation to bar the sale of flavored vapes and e-cigarettes earlier this year, it’s been more than a decade since the state raised the per-pack tax to $2.70.

Cigarette tax revenues, representing around $611 million in the 2018 fiscal year, provided a critical financial lifeline to a state that frequently struggles with its balance sheet.

As fewer New Jerseyans took up smoking over the last decade, a growing percentage of that revenue — the first $391.5 million collected annually — has to flow to an off-budget health care subsidy fund that subsidizes New Jersey hospitals for treating uninsured patients as well as some programs tied to New Jersey’s Medicaid program. Another $1 million is required for cancer research.

The next component of those revenues, enough to represent 65 cents of each pack of cigarettes sold in the state, is routed to a non-lapsing fund within the Treasury Department to pay down cigarette tax revenue bonds the state issued in 2004 to plug up its budget.

As of November, New Jersey still needed to pay down around $800 million of those bonds between now and 2029, according to documents reviewed by POLITICO.

Anything that’s left after that, typically between $70 million and $100 million in recent years, goes into the state’s general fund.

According to the Murphy administration, raising the tax rate to $4.35 per pack would give the state considerably more wiggle room to accommodate both the cigarette debt service and the health care subsidy fund.

Last year, New Jersey lawmakers abandoned a measure that would have prohibited the sale of menthol cigarettes out of concerns it might hurt the state’s finances. Sweeney, along with lead sponsor Sen. Joe Vitale, have said they plan to introduce a similar measure in the spring as part of the state’s budget process.

“If we do raise the tobacco tax, the revenue they’re projecting would certainly exceed the reduction they’d project from banning menthol cigarettes,” Vitale (D-Middlesex) said in an interview Tuesday.

Even without the higher tax, Vitale said he believes the effect of a menthol ban on cigarette tax revenues would be “minimal at worst.”

The state’s Department of the Treasury hadn’t taken into account a possible menthol ban when it tabulated its revenue projection from the higher tax. However, “there is a decline [in sales] assumed from the rate increase,” Treasurer Elizabeth Muoio told reporters at a budget briefing on Monday.

Previous tax hikes in New Jersey and other surrounding states can have an effect on sales, as some “residents may make extensive purchases in other states, especially those who commute to and work in New York or Pennsylvania. Similarly, cigarettes in New Jersey may be purchased by out-of-state residents,” according to IHS Global Insight, a consulting firm that assessed market risks with New Jersey’s cigarette bonds.

While it’s unlikely New Jersey smokers would load up on cartons in New York, where cigarettes are currently much more expensive, it’s also likely that fewer have been driving into Pennsylvania since it raised its cigarette tax rate to $2.60 per pack, within shouting distance of the $2.70 charged in the Garden State.

Either way, over time, cigarette tax revenues will continue to decline as fewer residents take up smoking.

“Every year, our tobacco tax revenue reduces because less people smoke,” Vitale said. “There’s going to come a time where we’ve been relying on this revenue and we’re just not going to have it.”