Even the best of intentions can run into the law of unintended consequences. And it looks like the "UC" law may be taking a bite out of Arizona's commitment to funding early-childhood development programs.
In 2006, Arizona voters approved Proposition 203, which hiked cigarette taxes by 68 percent in order to fund a variety of programs statewide dedicated to improving the quality of early-childhood development.
It was an ambitious effort, backed by a broad-based coalition of child advocates and supported enthusiastically in these pages of The Republic.
That support for Arizona's most vulnerable citizens has not ebbed, but the revenue source underwriting the work of First Things First, the umbrella organization that allocates Prop. 203 funding, certainly has. Since the first full year of funding, the 80 cents per pack in tobacco-tax revenue directed to First Things First has dropped steadily, from $171 million in 2007, the first full year of funding, to $132.4 million last year.
A portion of that drop in revenue should be celebrated, of course. Cigarette consumption drops as prices rise. Over a quarter of adults in Arizona smoked as recently as the mid-2000s. Now? According to the Kaiser Foundation, just 17 percent of us smoke.
But a report by the national Tax Foundation suggests that a highly elastic (that is, highly price-sensitive) consumer demand for cigarettes might not be the only explanation for the drop in legal cigarette sales.
A substantial part of the drop in legal sales (and in tax revenue) may be attributed to smuggling, which the foundation believes rose astronomically in Arizona following the 2006 tax hike. The foundation tracks the fluctuation of cigarette taxes in all 50 states and finds a high correlation between outbound smuggling from states with low cigarette taxes and inbound smuggling to states with high taxes.
Since the 2006 law took effect, Arizona has consistently ranked in the top five of in-smuggling of cigarettes, according to the foundation. Its data for 2013 ranks Arizona second, behind only New York with its $4.35 per-pack tax, which is the highest in the nation by far. The Tax Foundation project almost 52 percent of all cigarettes sold in Arizona are sold illegally.
Numerous factors contribute to that ranking. Our proximity to a foreign country, for example, as well as complex laws governing cigarette sales on tribal land. But the catalyst for all states invariably seems to be a tax hike.
Not everyone accepts the Tax Foundation's analysis.
The Arizona Department of Revenue acknowledges the cigarette-tax revenue declines, but attributes them to an elastic demand. A department spokesman said Thursday that Arizona inspectors have not uncovered any recent spike in smuggling operations.
Regardless, the Arizona Tax Research Association contends the big issue isn't so much smuggling. It is the effect of the loss of revenue attributable to the 2006 tax hike on state-supported operations that were not protected by the passage of Prop. 203.
A 2009 ATRA study of the effects of Prop. 203 found that its passage decimated revenue flowing to a pair of health-care-related funds that rely on tobacco taxes. The Tobacco Tax & Health Care Fund and the Tobacco Products Fund together lost over $50 million in funding from 2006 (the year Prop. 203 passed) to 2008.
First Things First advocates anticipated revenue losses. Prime mover Nadine Basha said she would be happy to lead the search for a new revenue source if tobacco sales zeroed out.
But the Tax Foundation report suggests that tobacco may be more persistent and addictive than we thought. And that smokers merely are finding another, less expensive way to get that nicotine fix.