Louisiana legislators are now considering several proposals to increase the state’s tobacco tax. One proposed by state Representative Harold Ritchie (D-Bogalusa) would increase the state’s cigarette tax from 36 cents per pack to 68 cents. The second proposal, suggested by Gov. Bobby Jindal (R), would increase the tax to the Southern regional average of 83 cents. Louisiana currently has the third-lowest tobacco excise tax rate in the country, behind only Missouri and Virginia.
Ritchie’s proposed tobacco tax hike was initially much higher. His original bill would have increased the tax to $1.54 per pack, the national average. Increasing the state’s excise tax to the national average would leave Louisiana with a higher tobacco tax rate than all of the neighboring states, including Arkansas ($1.15), Mississippi (68 cents), and Texas ($1.41).
Both of the proposals represent a significant increase in this highly regressive and distortionary tax. According to the Associated Press, Jindal’s plan attempts to make the tax neutral by using the new revenue to fund a tax break that would be given to college students in exchange for millions of dollars in increased fees that would be charged by their schools. Ritchie’s tax is estimated to raise $67 million annually while Jindal’s is estimated to raise $100 million.
Tobacco taxes are an unreliable revenue source used to prop up government spending while relying on a narrow and shrinking tax base, thus creating greater revenue gaps taxpayers must later fill by enduring additional tax increases. According to the most recent data from the U.S. Census Bureau, state revenue from tobacco products sales taxes decreased in 2013 by 0.9 percent, to $17.0 billion. This decrease followed a 0.5 percent reduction in 2012.
While reducing smoking rates is a noble goal, raising tobacco taxes rarely works as intended and frequently has many negative effects, including driving residents to buy untaxed or lower-taxed tobacco elsewhere, harming retailers in the state, unduly burdening lower- and moderate-income Louisianans, and propping up spending with an unsustainable source of revenue.
Louisiana retailers and wholesalers stand to lose sales as consumers avoid the tax by buying cigarettes outside both individual counties and the state. According to the National Association of Convenience Stores, cigarette sales account for 38.2 percent of all in-store sales at convenience stores nationwide. These stores not only lose tobacco sales, but also reduce other sales tobacco users may make while in stores.
Cigarette taxes are also highly regressive, unduly burdening moderate- and low-income individuals. According to the Bureau of Labor Statistics, 95.8 percent of tobacco expenditures are made by consumer units (people spending together) who earn less than $150,000 a year.
Targeted sin taxes on products such as tobacco disproportionately harm low-income taxpayers while punishing local businesses. The proposed tax would only further contract the market over time and create budget deficits taxpayers will eventually have to fill with additional tax increases. Instead of using taxes to try to change people’s behavior, Louisiana should focus on keeping taxes low by controlling government spending.
The following literature examines tobacco and other “sin” taxes from multiple perspectives.
Ten Principles of State Fiscal Policy
This Heartland Institute booklet provides policymakers and civic and business leaders with a highly condensed yet easy-to-read guide to state fiscal policy matters. It presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low,” to “Protect state employees from politics.”
Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
John Nothdurft of The Heartland Institute argues targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy backburner. Legislators concerned about the public health effects of tobacco should encourage the use of readily available smoking cessation products and services instead of supporting bad tax policy.
Sin Taxes: Size, Growth, and Creation of the Sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, taxing selected goods for general budget revenue contradicts the standard Pigovian social-welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive and preventive lobbying.
Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
This Heartland Institute Policy Brief argues, “Tax increases above current levels are not justified by appealing to the costs smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”
Cigarette Tax Hikes Burn Hole in State Coffers
Gregg M. Edwards, president of the Center for Policy Research of New Jersey, reports the state brought in less revenue after its cigarette tax hike than before the tax increase.
Poor Smokers, Poor Quitters, and Cigarette Tax Regressivity
Dr. Dahlia Remler of the Department of Health Policy and Management at Columbia University demonstrates cigarette taxes are regressive, burdening impoverished individuals more than other groups.
Debunking the “Tax Thee, But Not Me” Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes
The nonpartisan National Taxpayers Union observes, “The per-capita state and local tax burden in high-tobacco tax states is 8 percent above the national average, while the general tax bill for residents of low-tobacco tax states is 15 percent below the national average.”
Cigarette Taxes and Smoking: Will Higher Taxes Yield a Public Benefit?
Kevin Callison and Robert Kaestner of the Cato Institute summarize their study focusing on the effect of recent, large cigarette tax increases on the smoking behavior of adults ages 18–74. The data suggest the association between cigarette taxes and either smoking participation or number of cigarettes smoked is small, negative, and not usually statistically significant.
Cigarette Taxes, Black Markets, and Crime: Lessons from New York’s 50-Year Losing Battle
Patrick Fleenor examines in this Cato Institute paper New York’s half-century battle with cigarette black markets and related crime. It documents consumer responses to tax increases and discusses law enforcement and policy efforts to curb the negative side effects of high cigarette levies. Finally, the paper discusses national and international experiences with cigarette taxes and finds New York’s experience is typical of jurisdictions levying high cigarette taxes.
Cigarette Taxes and Smuggling: A Statistical Analysis and Historical Review
In this study, the authors consider cigarette smuggling from two angles. First, they employ a statistical model to estimate the degree to which cigarette smuggling occurs in 47 of the 48 contiguous U.S. states. Second, they review the historical experiences of three states — Michigan, New Jersey and California — known to have problems with cigarette smuggling. The author’s findings suggest state policymakers should reassess the value of cigarette taxes as a revenue and public health tool.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s state government relations manager, at [email protected] or 312/377-4000.