Governor O'Malley's proposal to close the $1.7 billion budget deficit includes hiking the cigarette tax to $2.00 per pack from $1.00-a 100 percent increase. In addition to closing the deficit, the Governor will also earmark some of this money to expand access to healthcare. Overall, the state bean-counters have estimated that the cigarette tax hike will generate $166 million in new revenue in FY 2009 (the first full year of the tax increase).

However, the Governor should be wary of increasing cigarette taxes, or any tax for that matter, in light of the election night results from Oregon. Oregon voters were asked to increase their cigarette tax by $0.845 to $2.02 per pack from $1.18 per pack in order to fund expansion of the State Children Health Insurance Program-commonly referred to as SCHIP. Naturally, in a blue state like Oregon such a ballot question appeared to be a slam-dunk for enactment. Contrary to conventional wisdom, the ballot measure was rejected by a resounding 60-40 margin.

A recent editorial from the Wall Street Journal sums it up best: "Voters are rightly concerned about health care and would like everyone to have insurance, but they realize that government programs are very expensive. Americans also don't seem to want to pay for health-care reforms directly through higher taxes." As in Oregon, the Governor's plan to raise taxes to balance the budget and increase spending is not likely to go over well with Maryland's taxpayers.

Finally, in a recent Maryland Public Policy Institute report titled "Pricier Cigarettes Are No Budget Panacea," shows Governor O'Malley's revenue projections for the cigarette tax increase were clearly made through rose (or is it smoke?) colored glasses. In particular, a reasonable adjustment for the effect of cross-border cigarette shopping, or smuggling, reveals a much reduced revenue gain. When cross-border shopping is fully accounted for, the increase in cigarette revenue would actually be $173 million lower than the Governor's estimate between FY 2008 and FY 2012. Clearly, this is not a reliable way to balance the budget.

In addition, Maryland state government should also expect lower sales and income tax revenue as well. In fact, the Department of Legislative Services has estimated a $13 million decrease in sales tax revenue between FY 2008 and FY 2012. Unfortunately, there is no estimate for lower income tax revenue but we can expect that many businesses will suffer lower profitability due to the higher cigarette tax. Other studies have shown that the convenience store industry, in particular, will be hit hard-especially those stores located on the Maryland-Virginia border which will see the greatest tax rate differential.