In November, South Dakota voters will decide whether to increase taxes on cigarettes and other tobacco products (OTPs). If successful, the ballot initiative would increase taxes by $1 on 20-cigarette packs and $1.25 on 25-cigarette packs. The tax on OTPs would increase from 35 percent of the wholesale price to 55 percent.
Lawmakers claim the taxes are necessary to fund postsecondary technical education. However, increasing taxes on tobacco unjustly punishes smokers and creates unstable tax revenue streams.
South Dakota, like many states, uses very little of the tobacco tax revenue it collects on cessation programs. Currently, the Mount Rushmore State deposits the “first $30 million of tobacco revenue collected annually … into the State general fund.” The next $5 million is placed “into the existing tobacco prevention and trust fund.” The ballot initiative would “require the next $20 million to be deposited into the technical institute created by [the] measure,” according to the proposal.
Although often portrayed as measures to generate revenue, high cigarette taxes typically result in consumers choosing to purchase cigarettes in neighboring states with lower tax rates or through black markets. These unintended consequences often end with less-than-expected total state revenue. In some cases, revenue is even lower than before the tax increase was implemented.
At $1.53 per pack, South Dakota’s cigarette tax is lower than the national average ($1.68 per pack), but it is “higher than four of its six bordering states.” Furthermore, South Dakota already ranks 14th among all states for its high rate of cigarette smuggling, according to the Tax Foundation.
To understand the negative impact high cigarette taxes often have, South Dakotans ought to consider what happened after Minnesota increased its tobacco taxes. A 2014 report by John Dunham and Associates examined the economic consequences of a recent cigarette tax increase in the North Star State. Border communities experienced “per capital sales losses of 27% to 42%,” with per capital sales in border regions dropping “by 30.1 percent in the aftermath of the tax increase … 50 percent larger than the estimated 19.8 percent reduction statewide.” Making matters worse, the tax increase “put more than 1,100 Minnesotans out of work.”
Like most sin taxes, tobacco taxes are an unreliable source of revenue. Although sin taxes usually create short-term revenue increases, they very frequently generate lower funds in the long term. For example, between 2001 and 2011, “revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased,” the National Taxpayers Union Foundation (NTUF) found. Moreover, the number of adult smokers is declining and “consumers often supplant cigarettes with alternative products that are taxed at lower rates,” NTUF notes. South Dakotans should realize that raising tobacco taxes in no way guarantees more revenue will be earmarked for technical education over the long term.
Besides their unstable nature, cigarette taxes are also highly regressive and disproportionately impact lower-income persons. From “2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000,” a Cato Journal article determined.
High tobacco taxes disproportionately impact lower-income individuals, foster black market activity, hurt small businesses, and are unreliable sources of revenue. Come November, voters in the Mount Rushmore State ought to snuff out regressive and unreliable tobacco tax hikes.
The following documents provide additional information on tobacco and sin taxes.
Three Reasons to Avoid Tobacco Taxes
Elizabeth Stelle of the Commonwealth Foundation examines Pennsylvania’s proposed tobacco tax hikes. Stelle argues they are the wrong prescription for the state, and she outlines several reasons why they are harmful.
Cigarette Taxes and Smoking
In this study from the Cato Institute, Kevin Callison and Robert Kaestner suggest future cigarette-tax increases will offer relatively few public health benefits, and they say the justification given for future taxes should be based on the public finance aspects of cigarette taxes, such as the regressiveness, volatility, or the rate of revenue growth associated with those taxes.
Ten Principles of State Fiscal Policy
This Heartland Institute booklet provides policymakers and civic and business leaders 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
Heartland Institute Government Relations Director John Nothdurft argues targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. 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.
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.”
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 poor 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 and Smuggling: A Statistical Analysis and Historical Review
The authors of this study 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 – California, Michigan, and New Jersey – known to have cigarette-smuggling problems. The findings suggest state policymakers should reassess the value of cigarette taxes as a revenue source 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 John Nothdurft, Heartland’s director of government relations, at [email protected] or 312/377-4000.