(The Jeffersonian Project) – The Nevada Legislature is currently considering SB 455 and SB 483, which would increase taxes on cigarettes by 50 percent. The American Legislative Exchange Council (ALEC) has conducted non-partisan research on this topic and has come to the following conclusions: Whatever policymakers’ intentions, singling out a specific product or group of products (in this case, cigarettes) for an extra severe tax assessment is contrary to the principles of sound tax policy, will not significantly improve public health and will harm the state’s economy overall.
First and foremost, the tax code is the mechanism by which government collects the necessary revenue to fund essential government services and programs. Trying to manipulate consumer choices by penalizing or incentivizing certain products over others has no place in the tax code. The ALEC Principles of Taxation provides a succinct explanation:
Economic Neutrality – The purpose of the tax system is to raise needed revenue for core functions of government, not control the lives of citizens or micromanage the economy. The tax system should exert minimal impact on the spending and decisions of individuals and businesses. An effective tax system should be broad-based, utilize a low overall tax rate with few loopholes, and avoid multiple layers of taxation through tax pyramiding.[i]
Next, small businesses that rely on the revenue that tobacco and tobacco substitutes bring in would feel the most damaging effect of this type of specific tax penalty. Sales of tobacco products represent more than 40 percent of total sales at convenience stores nationwide. Convenience store owners and employees, especially those that border other states with more favorable tobacco tax rates will be hit the hardest by this new tax (NACS State of the Industry Report – 2012, National Association of Convenience Stores, Table 9A; Released June 25, 2013).
When Minnesota increased their tobacco tax rate by 130 percent in 2013, the result was a decline of about 50 percent in per-capita sales among border counties. This drop in sales however should not be seen as evidence as a decrease in overall smoking, but rather a simple shift in purchasing location as border counties in all four states, including Washington, bordering Minnesota reported dramatically higher tobacco sales (John Dunham and Associates and Orzechouski and Walker. “The Economic Consequences of the Recent Cigarette Tax Increase in Minnesota.” June 13, 2014).
Accompanying the drop in sales came other discouraging economic effects resulting from Minnesota’s 2013 tobacco tax increase. A study from John Dunham and Associates and Orzechowski and Walker estimates that 1,100 jobs in Minnesota have been lost or eliminated as a result of the tax increase. An estimated $38 million in sales of non-tobacco products was also lost. The study also estimates that it is likely that about a quarter of all tobacco products currently consumed in Minnesota were purchased out of state.
Additionally, taxing tobacco products at a much higher rate, as opposed to treating them like any other product in the sales tax base, is not just bad tax policy, but also provides no boon to public health. A study by Kevin Callison and Robert Kaestner for the Cato Institute finds that increasing taxes on cigarettes has very little, if any effect, on the overall amount of smoking. The authors observe that “While the conventional wisdom is that cigarette taxes reduce adult smoking and in doing so serve an important health function, the actual evidence to support this conclusion is relatively sparse.” At another point the authors summarize their findings, saying that, “our study suggests that future cigarette tax increases will have relatively few public health benefits.” Ultimately, if the goal is to reduce harm to consumers’ health, the data shows that increasing tobacco taxes is a poor method for achieving that goal.[ii]
Cigarette excise tax increases also cause Nevada to lose business to other states.While Nevada’s cigarette tax is lower than some of its neighbors, neighboring Idaho still levies a more competitive tax rate on cigarettes. If the tax on a pack of cigarettes were to be increased by 50 percent, Nevada would have a higher tax on cigarettes than neighboring California as well.[iii] As consumers purchase cigarettes in other states, it is very likely that Nevada will collect less revenue than expected from a cigarette tax increase.
Finally, if the goal is to raise tax revenue, increasing tobacco taxes is an extremely poor way to do so. Tobacco taxes and similar taxes on tobacco substitutes are an extremely volatile source of state revenue. If the state increases taxes, there is a strong incentive to purchase tobacco from out of state or black market sellers and traditional cigarette sales will be dramatically reduced, resulting in lackluster revenue collections. Between fiscal years 2009 and 2013, approximately 32 state excise tax increases went into effect. Ninety-one percent of these state excise tax increases failed to meet their revenue projections. For example, in 2012 Illinois significantly raised taxes on traditional cigarettes. The state projected the measure would net an additional $325 million in new revenue. Consumers reacted to the excessive tax by traveling across state lines to purchase cigarettes, resulting in only $212 million in revenue — more than one third less than the state expected to take in.[iv] Basing public health budgets on such a volatile, and declining, revenue source makes little fiscal sense.
Whether the goal is to raise revenue or to improve public health, increasing tobacco taxes by such a large amount is simply an ineffective public policy option.
The Jeffersonian Project is the 501(c)4 affiliate of the American Legislative Exchange Council. Visit www.alec.org for more information.