Christie resorts to e-cigarette tax to plug $807 million deficit

5/5/2014

New Jersey Governor Chris Christie, seeking cash in the face of a $1.06 billion shortfall, proposes leaning harder on smokers with a tax on electronic cigarettes.

The only U.S. state that spends none of its own money to combat nicotine addiction, New Jersey would use the estimated $35 million in annual revenue for general spending. Christie’s plan follows a deal on tobacco bonds in March that contributed to a credit downgrade for $2.4 billion in state general- obligation debt.

The proposed tax highlights Christie’s struggle to return the state to fiscal stability. The 51-year-old Republican is trying to persuade Democratic lawmakers to trim spending after his administration overestimated revenue projections for three straight years.

“As far as fiscal distress goes, we are veterans in this state, and we have either raised taxes or we have reneged on obligations to close a gap,” said Peter Woolley, a politics professor at Fairleigh Dickinson University in Madison. “Thirty-five million dollars in the scheme of things sounds like a lot, but really isn’t.”

Christie has proposed a record $34.4 billion budget for the year that begins July 1 even as the current spending plan is endangered. An $807 million gap he disclosed last week brings the shortfall to $1.06 billion, according to Moody’s Investors Service.

Moody’s called that a “credit negative development” in a report by Baye Larsen, a senior analyst. 

Lowest Ratings

Fitch Ratings downgraded the state to A+ on May 1. The firm’s bestowal of the fifth-highest investment grade follows a similar move April 9 by Standard & Poor’s and leaves New Jersey’s rating higher than only California and Illinois among U.S. states.

S&P last month cited over-optimistic projections and one- time infusions, such as a March 7 deal to raise $96 million by pledging five years of tobacco-settlement revenue to investors. Richard Larkin, director of credit analysis at Fairfield, Connecticut investment firm Herbert J. Sims & Co. termed it “fiscal chicanery” in an April 11 note to investors.

Chris Santarelli, a spokesman for state Treasurer Andrew Sidamon-Eristoff, called the maneuver a responsible step that represented present-value savings of $136.7 million and nominal debt-service savings of $1.23 billion.

Pointing Fingers

Christie has said New Jersey is paying for poor management by past administrations from both parties. His attempts to ignite the economy haven’t succeeded, though, and New Jersey lags behind its neighbors and the U.S. on job creation and revenue growth.

From the second quarter of 2009 through the end of 2013, New Jersey ranked 38th in economic health, according to the Bloomberg Economic Evaluation of States.

The first year Christie eliminated spending on educating people about tobacco use was 2013. New Hampshire, North Carolina and Ohio also had zero expenditures that year. By 2014, New Jersey was the sole state without funding, according to the Campaign for Tobacco-Free Kids, a Washington-based nonprofit group supported in part by the Bloomberg Initiative to Reduce Tobacco Use, founded by Michael Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP.

Christie is positioning New Jersey for a second time to spend nothing of its own on cessation. Such expenditures have risen nationally for three years. 

Medical Care

New Jersey is to reap an estimated $947.2 million this year from tobacco sales and the 1998 settlement of health-care expenses for 46 U.S. states from cigarette companies. The Atlanta-based Centers for Disease Control and Prevention, the nation’s health-protection agency, recommends that New Jersey spend $103.3 million in state money annually to combat tobacco, the 10th-largest sum nationally.

“It’s not like we don’t pay for these people,” said Jill Williams, a physician and director of addiction psychiatry at Robert Wood Johnson Medical School in New Brunswick. “We pay for their heart attacks and strokes and cancer treatment. Why not invest in their tobacco cessation?”

Cigarette smoking is the cause of 480,000 annual U.S. deaths, about one in five, according to the CDC. More than 10,000 New Jerseyans die every year of tobacco-related illness.

No state came up with its full share of CDC-recommended funding on its own in 2014, according to the Campaign for Tobacco-Free Kids. Such funding was part of the intent, though not a requirement, of the settlement with cigarette makers. 

Health Pitch

At peak in 2003, New Jersey spent $30 million on efforts including counseling and nicotine-replacement therapy. It now spends about $1.6 million in federal grants annually, according to Donna Leusner, a health department spokeswoman.

Sidamon-Eristoff told the Senate budget committee that the motivation for the proposed tax on vapor cigarettes was public health.

The New Jersey Legislature has already joined Congress in treating e-cigarettes as equivalent to conventional ones for purposes such as restricting sales to minors and smoke-free air laws, the treasurer said April 1.

“Tax parity is the logical next step,” he said. “Why should we favor one form of delivering highly addictive, tobacco-derived nicotine over another, especially in light of the unknown health risks and the obvious marketing focus on youth and young adults?”

Peter Fisher, vice president for state issues for Tobacco- Free Kids, said higher prices can do only so much.

“E-cigarettes are being marketed just like tobacco products used to be,” he said in a telephone interview. “We would certainly support his proposal to tax e-cigarettes just like combustible ones, but we would strongly urge that the revenue be used for anti-smoking efforts.”