Nikita2706 / CC BY-SA 3.0
Nikita2706 / CC BY-SA 3.0
Tax Reform

Filtering out the Myths Supporting Cigarette Taxes

The Nebraska Legislature recently considered raising the tax rate on tobacco products such as cigarettes. The bill was brought to committee but, thankfully, failed to receive enough votes to be heard on the floor. In this case, Nebraska legislators made the right decision – an unreliable source of revenue and discriminatory in nature, cigarette taxes offer little benefit to the public good and can actually harm a state’s economy.

The most common arguments cited in support of increasing taxes on tobacco products are revenue generation for the state and improving public health. Taxes on cigarettes and other tobacco products are effective at neither. A recent study, The Economic Consequences of the Recent Cigarette Tax Increase in Minnesota, found that when Minnesota increased its per-pack tax rate on cigarettes by 130 percent in 2013, the state suffered a string of unintended consequences. Retailers along the bordering counties in Minnesota suffered a decrease in tobacco revenue ranging from 27 to 42 percent, depending on location. On its face, that statistic would likely appease health-oriented individuals who might assume it represented a decrease in Minnesota’s smoking population. That was not the case. Rather, commerce merely shifted to neighboring states.

Counties in Iowa, Wisconsin, North Dakota and South Dakota that bordered Minnesota enjoyed significant increases in tobacco revenue. That money left Minnesota and, as a result, small businesses along its border were hurt. Not only was revenue from tobacco sales lost, but also sales typically made alongside cigarettes, ranging from snacks and lottery tickets to gasoline. The above-cited study calculated that small businesses lost more than $38 million in non-tobacco revenue.

Residents of high-tax states can be trusted to behave rationally and avoid unnecessarily high burdens, whether in the form of personal income taxes or, as in this case, taxes levied on specific products. Tragically, as was the case in Minnesota, the decrease in commerce resulted in an estimated loss of 1,100 jobs in areas like retailers, wholesalers and distributors.

As a revenue source, tobacco taxes are unreliable and can contribute to inaccurate budget projections. Because of the dynamic nature of consumption, and the rational propensity of individuals to reduce their own expenses, Nebraska would have almost certainly collected less revenue than projected. For example, when the state of Illinois elected to increase cigarette taxes by $1 per pack in 2012, officials projected revenue generation of $350 million for the fiscal year. Only $212 million was collected, a discrepancy that contributed to Illinois’ ongoing budget crisis.

The public good is often and repeatedly invoked in defense of increased cigarette taxes, but despite advocates’ claims, cigarette taxes do little to actually improve public health. Writing for the Cato Institute, scholars Kevin Callison and Robert Kaestner authored a study called Cigarette Taxes and Smoking. In it, they argue “future cigarette tax increases will have relatively few public health benefits.” Noting an existing relationship between increases in cigarette taxes and decreases in smoking between the years 1980 and 1994, Callison and Kaestner assert the relationship ceased to exist beyond 1994: “[Cigarette] taxes remain flat between 1994 and 1998 and then spike between 1998 and 2009, with no noticeable change in the trend in cigarette consumption.” In periods with either heavy tax increases or no tax increases, consumption rates did not change. Because of this, there is no reasonable expectation that public health necessarily improves by virtue of increased cigarette taxes.

If the concern of state officials is with the public welfare, the choice is clear. Based on the empirical data collected from other states, increasing cigarette taxes will chill commerce, burden small businesses, damage employment rates and do little for public health. A high tax burden, discriminatorily placed on a single industry, may be a boon to the state, but it’s a burn on taxpayers.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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