Two proposals are being considered in Oregon to increase tobacco excise taxes at the state and local levels.
One proposal would increase the statewide tobacco tax from $1.18 per pack to $2.18. Although the current rate is below the national average of $1.48, it is higher than all of Oregon’s neighbors’ (Idaho: 57 cents, Nevada: 80 cents, California: 87 cents) except Washington. The proposed tax hike would greatly increase this disparity.
The second proposal would add a further layer of tax on tobacco products by allowing counties to levy their own taxes in addition to the state and federal excise taxes. It would limit the additional county tobacco tax to the level of the statewide rate while requiring counties to dedicate 40 percent of the revenue raised by the taxes to tobacco prevention programs.
Discouraging smoking is a laudable goal, but raising tobacco taxes rarely works as intended and has many negative effects, including driving residents to buy untaxed or lower-taxed tobacco elsewhere, reducing revenues for retailers in the state, unduly burdening low and moderate-income families, and propping up spending with an unsustainable source of revenue.
Both of these proposals likely would drive consumers to purchase tobacco in other states and increase black-market sales of tobacco products. Neighboring Washington’s tobacco tax is much higher than Oregon’s at $3.025; some 35 percent of the cigarettes in the state are smuggled.
The proposed tax hikes would reduce overall sales by Oregon retailers and wholesalers as consumers avoided the tax by buying cigarettes outside the state. The National Association of Convenience Stores reports cigarette sales account for 38.2 percent of all in-store sales at convenience stores. The 3,590 Oregon retailers who sell tobacco products would lose not only tobacco sales but also other purchases those customers would otherwise make while in their stores.
Cigarette taxes are highly regressive, unduly burdening moderate- and low-income individuals. The Bureau of Labor Statistics reports 95.8 percent of tobacco expenditures are by consumer units (people spending together) who earn less than $150,000 a year.
Finally, tobacco taxes can lead to budget shortfalls. Tobacco taxes are a notoriously unreliable and shrinking source of revenue because the number of smokers is decreasing. Instead of raising particular taxes on Oregonians, lawmakers should advance pro-growth policies that strengthen the economy while controlling spending.
The following literature examines tobacco and other “sin” taxes from multiple perspectives.
Ten Principles of State Fiscal Policy
http://heartland.org/policybot/results/19354/
This Heartland Institute booklet provides policymakers and civic and business leaders with a highly condensed yet easy-to-read guide to state fiscal olicy 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
http://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-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 back burner. Legislators concerned with the public health effects of tobacco should encourage the use of readily available smoking cessation products and services, instead of supporting bad tax policy.
Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
http://heartland.org/policy-documents/research-commentary-best-and-worst-ways-eliminate-budget-deficit
John Nothdurft identifies some of the most and least effective and economically advisable ways states use to trim their budget deficits.
Sin Taxes: Size, Growth, and Creation of the Sindustry
http://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, taxing selected goods for general budget revenue contradicts the standard Pigouvian 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 preventive and defensive lobbying by the affected industries.
Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
http://heartland.org/policy-documents/five-things-consider-raising-tobacco-taxes-review-research
Eli Lehrer argues, “Tax increases above current levels are not justified by appealing to the costs that smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”
Debunking the “Tax Thee, But Not Me” Myth: Five Reasons Why Non-Smokers Should Oppose High Tobacco Taxes
http://heartland.org/policy-documents/debunking-tax-thee-not-me-myth-five-reasons-why
The 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, Black Markets, and Crime: Lessons from New York’s 50-Year Losing Battle
http://heartland.org/policy-documents/cigarette-taxes-black-markets-and-crime-lessons-new-yorks-50-year-losing-battle-0
Writing for the Cato Institute, Patrick Fleenor examines New York’s half-century battle with cigarette black markets and related crime. The study documents consumer responses to tax increases and discusses law enforcement and policy efforts to curb the negative effects of high cigarette levies. Finally, he discusses national and international experiences with cigarette taxes and finds New York’s problems are typical of jurisdictions levying high cigarette taxes.
http://heartland.org/policy-documents/cigarette-taxes-and-smuggling-statistical-analysis-and-historical-review
The authors of this study consider cigarette smuggling from two angles. First, they employ a statistical model to estimate how much 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 smuggling problems. The findings suggest state policymakers should reassess the value of cigarette taxes as a revenue and public health tool.
Taxing Sin
http://heartland.org/policy-documents/taxing-sin
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation,” they write.
Cigarette Taxes and Cigarette Smuggling by State
http://taxfoundation.org/article/cigarette-taxes-and-cigarette-smuggling-state
The Tax Foundation outlines the cigarette smuggling data for each state, comparing 2011 and 2006 smuggling rates and tax changes.
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 and other topics, visit the Budget & Tax News Web site at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
