Arkansas recently increased the state’s cigarette excise tax rate from $0.59 to $1.15 per pack, but lawmakers threw in a positive twist: The legislation reduces cigarette excise tax rates in some border towns, a provision designed to mitigate the revenue loss the state would experience from cross-border shopping.
If two adjoining towns are separated by the state line, the cigarette tax in the Arkansas town will be equal to the cigarette tax in the adjoining town plus 3 cents, so long as the resulting tax rate is not greater than the state’s standard tax rate. The law also provides that cigarettes sold in Arkansas within 300 feet of the state line, regardless of the area’s population, be taxed at the bordering state’s rate plus 3 cents if the resulting rate is lower than Arkansas’ standard rate.
Governor Pushed Tax Hike
Gov. Mike Beebe (D) had pushed for the tax increase to help fund some of the state’s health care initiatives, mainly improved trauma care.
“While border shopping is illegal, it can become a significant problem when states have relatively high cigarette taxes,” said Mark Robyn, an analyst with the Washington, DC-based Tax Foundation. “Unfortunately, state lawmakers often ignore the amplifying effect that high cigarette taxes have on border shopping and other illegal activities such as smuggling and untaxed Internet purchases. If this policy is successful in Arkansas, other state legislatures may follow suit.”
Higher than Bordering States
Before the law passed, the state’s tax rate was 59 cents a pack, higher than three neighboring states: Louisiana (36 cents), Mississippi (18 cents), and Missouri (17 cents). With the increase to $1.15, Arkansas surpassed Tennessee (62 cents) and Oklahoma ($1.03) as well, leaving it with only one neighbor with a higher excise tax on cigarettes: Texas ($1.41).
The towns that qualify as border zone cities are Junction City (bordering Louisiana); Garfield, Gateway, Holiday Island, Mammoth Spring, Blue Eye, Pea Ridge, and Oak Grove (all bordering Missouri); Ft. Smith, Van Buren, Siloam Springs, and Bonanza (all bordering Oklahoma); and West Memphis and Marion (bordering Tennessee).
In Mammoth Spring, across the state line from Thayer, Missouri, business at the Spring River Superette Smoke Shop is holding up even though Thayer businesses still can sell tobacco items for less, said shop owner Jerry Grooms.
“The law helps somewhat, but it doesn’t keep us totally competitive,” Grooms said. “In Fulton County [which includes Mammoth Spring], the sales tax is nine cents on the dollar. Across the line in Thayer it’s about three cents lower. People have said they’re going across the line to buy where things are cheaper.”
Sure of Benefits
State Rep. Keith Ingram (D-West Memphis) led the push to include the tax rate flexibility for border towns. Ingram said as the former mayor of West Memphis he knew many residents would drive across the Mississippi River to Memphis, Tennessee to save money.
“The gist of the law is to not place your merchants at a competitive disadvantage because of taxes,” said Ingram. He said the state ordinarily would expect to lose tobacco sales in border towns, and sales of other items that people often buy when they purchase cigarettes, because of people crossing the state line to shop where the tax rate is significantly lower.
“We’re really not going to give anything away by doing this, because in reality people would have bought across the border,” Ingram said.
Ingram said he supported the cigarette tax hike “because we were the only state in the Union that did not have a trauma network. I voted for that. I voted for the bill that raised the tobacco tax to fund a network.”
Border Town of Border Town
Ward Wimbish, director of economic development for West Memphis, said he has no doubt the flexibility in the law, which took effect in April, is helping the city keep retail sales.
“I know it does,” Wimbish said, because Marion, a community that abuts West Memphis, at first was not included in the exemption.
“Merchants in Marion noticed right away people were [going] to West Memphis to buy their cigarettes,” Wimbish said. “I said Marion should be included, and they were added. If we and Marion had to charge the full state tax, people would have crossed over [to Memphis] for more than 50 cents a pack savings. There is a Sam’s Club there that’s easy to get to. They would have gone over there.”
Revenue Gain Expected
According to Robyn, the new cigarette tax structure will probably result in a net revenue gain for Arkansas. Instead of giving up all the revenue that would normally be lost in border shopping, the state is now giving up only the revenue represented by the tax differential.
Robyn notes there are potential drawbacks, however.
“This policy effectively allows neighboring states to set Arkansas’ excise tax rate in the border zones,” Robyn says. “Additionally, the state now has six cigarette excise tax rates to administer instead of just one, making administering and complying with the tax more burdensome for tax officials and retailers.”
Phil Britt ([email protected]) writes from South Holland, Illinois.