New “sin tax” hikes, approved by Kansas lawmakers in June, are prompting residents to buy tobacco in nearby states with lower tax rates.
Lawmakers approved increasing the excise tax on cigarettes from 79 cents per pack to $1.29 a pack, a 63 percent hike. A new 20-cents-per-milliliter tax on e-cigarette fluid was also approved and is scheduled to take effect in 2016.
The tax hike on cigarettes has Kansas stores near the border noticing a decline in sales as customers are driving to Missouri and Oklahoma to buy less expensive cigarettes.
The new sin taxes were supposed to patch the state’s $400 million deficit, but Philip DeCicca, associate professor of economics at McMaster University, says sin tax increases are an unreliable way to raise revenue.
“Many states count on cigarette revenues to fund public health and other programs, as well as to bolster the general fund,” DiCicca said. “It is likely their revenues will not match their expectations.”
DeCicca says higher sin taxes can backfire in several ways.
“People respond to [sin taxes] either by crossing borders or, as some [research] work shows, by smoking cigarettes harder with deeper inhalations,” DeCicca said. “In other words, smokers are rational and respond to incentives when they can.
“If the tax difference is high enough and enough people live closely [to another state with lower taxes], as is the case in ]Kansas City, Kansas,] one could imagine that Kansas will not gain as much revenue as it expected,” DeCicca said. “In general, cigarettes remain fresh for about three months, so a pack-a-day smoker could go and buy 90 packs, or nine cartons, for the price differential minus the cost of driving and how [much the] individual values his or her time. In some states a single trip like this could easily save $100.”
‘Taxpayers Are Not Sheep’
Michael LaFaive, director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, says the outflow of Kansas sin tax revenue was expected.
“This was very clearly an expected outcome,” LaFaive said. “Taxpayers are not sheep lining up to be sheared. Consumers of many products, most specifically cigarettes, have long crossed borders to obtain lower prices.
“If they can find an equal or better product at a lower price, they’re going to seek it out,” LaFaive said.
Amelia Hamilton ([email protected]) writes from Traverse City, Michigan.
Robert W. McGee, “Some Ethical, Legal and Economic Problems With the Use and Abuse of Excise Taxes As A Tool of Social Engineering,” Journal of Accounting, Ethics & Public Policy: https://heartland.org/policy-documents/some-ethical-legal-and-economic-problems-use-and-abuse-excise-taxes-tool-social-eng/