Politicians continue to take aim at “Big Tobacco” in the search for additional tax revenues, as Kansas Gov. Kathleen Sebelius (D) recently announced plans to put a 50 cents per pack cigarette tax increase “right back on the table.”
Not to be outdone, the Kansas Health Policy Authority subsequently proposed hiking the tax by 75 cents a pack, to pay for new spending on government health care programs.
Unfortunately for the governor and the authority, hiking taxes on smokers is one of the least-effective ways to raise long-term revenue.
Avoiding High-Tax Areas
Raising cigarette taxes always looks attractive to lawmakers on paper, as revenue forecasters often show a windfall of projected receipts. In the real world, however, people respond to incentives, and cigarette taxes have been shown to encourage smokers to avoid high-tax jurisdictions.
As state after state has learned, the promise of substantial cigarette tax revenue often goes up in smoke.
In Maryland, for example, lawmakers last year doubled the state’s cigarette tax to $2 a pack to pay for additional health care and balance the budget. They expected a revenue boom to help fix their state’s unstable finances.
They were sorely disappointed. Cigarette sales are down 25 percent in the state—nearly 30 million fewer cigarettes have been sold in Maryland since the tax increase took effect this year. The cigarette tax, supposedly the panacea for the state’s budget woes, has come up short, and lawmakers in Annapolis are back at the drawing board.
Retailers in Maryland have seen their cigarette sales plummet because of good old-fashioned competition—in this case, tax competition. Just across the Potomac River, Maryland residents can take full advantage of the lower taxes in Virginia. Maryland’s neighbor to the south has one of the lowest cigarette taxes in the nation, at 30 cents a pack.
The cost difference with a bordering state has made it profitable for Maryland drivers to venture down Interstate 95 into the Old Dominion, saving $1.70 a pack in cigarette taxes alone. Maryland has responded with hopeless investigations and searches of suspected “tax evaders” on the border.
Missouri’s Low, Low Tax
Only a few states have lower cigarette taxes than Virginia. Unfortunately for Sebelius and the other cigarette tax-hikers in Kansas, neighboring Missouri is one of them. The Show-Me State levies a tax of only 17 cents per pack of cigarettes, the second lowest cigarette tax in America.
With such competitors sitting just across Kansas’s border, every policymaker in Topeka should understand policy changes are not created in a vacuum. Every time a state changes tax policy, it directly and immediately influences the choices of businesses and individuals—in this case, smokers.
If the Kansas Health Policy Authority is successful and Kansas lawmakers adopt the proposed 75 cents per-pack cigarette tax increase, the tax would increase to $1.54 per pack. The tax cost per pack of cigarettes would be $1.37 lower in Missouri, and Kansas’s tax would be higher than in any bordering state.
Even state House Minority Leader Dennis McKinney (D-Greensburg) has publicly acknowledged the difficulty of Kansas competing with Missouri if the tax increase passes.
Border State Competition
As lawmakers in Maryland have painfully learned, states cannot expect cigarette taxes will raise enough revenue to solve budget problems or expand health coverage. States cannot expect smokers to ignore the incentive to purchase their cigarettes in bordering states, especially when the cost difference is very high. The thousands of residents in Johnson County would be only a short drive away from significant savings on tobacco products.
Unfortunately, with politically charged topics such as these, it is easy for some public policy leaders to lose sight of basic economic realities. However, it is clear Kansas’s proposed tobacco tax increase will fail to raise the expected revenue. Consumers will have a greater incentive to purchase their cigarettes across state lines, and today they can evade the increased taxes in the comfort of their own home, through the Internet.
Politically, cigarette taxes are an easy sell because they target a small fraction of society and involve a socially unpopular activity. Nonetheless, cigarette taxes are strikingly bad public policy.
Jonathan Williams ([email protected]) is an economist and director of the Tax and Fiscal Policy Task Force of the American Legislative Exchange Council.