As states continue to face budget problems, some have considered so-called “sin” taxes to bring in more revenues. For example, next year lawmakers in Wyoming are likely to consider increasing the state’s tobacco tax rates to help fill a dwindling fund that is supposed to conduct advertising and education efforts to encourage people to stop smoking. Established after the 1998 Master Settlement Agreement, the fund, which uses tobacco tax dollars along with lawsuit payments from cigarette companies, is projected to have a $14.6 million shortfall by July 2018.
Currently, Wyoming imposes a 3 cent tax per cigarette or 60 cents a pack, tied for eighth-lowest in the nation. In November, the state’s Joint Revenue Committee will consider recommending increasing the tax in the 2016 session. Estimates from the legislature predict a 2 cent per pack increase would raise $600,000 a year in additional revenue, assuming cigarette sales don’t change. In February, the Wyoming Legislature voted against a proposal to raise the cigarette tax to $1.25 per pack.
Wyoming retailers and tobacco industry representatives opposed that increase, saying they would lose sales as consumers avoid the tax by buying cigarettes outside both individual counties and the state. “If the 65-cent increase went through, the difference in price for a person who smoked one pack a day, if they went over to Idaho, would be $376 a year,” Barbara Stafford of the Wyoming Retail Merchants Association told the Casper Star Tribune.
The state also considered extending the tobacco tax to e-cigarettes even though they are completely different products. According to many in the public health community, e-cigarettes are far safer than combustible cigarettes. Several studies have found e-cigarettes to be an effective way to help smokers reduce their cigarette use or quit altogether, thus bringing significant public health and financial benefits to states and the nation.
Tobacco taxes are an unreliable revenue source used to prop up government spending while relying on a narrow and shrinking tax base, creating greater revenue gaps taxpayers must later fill by enduring additional tax increases. According to recent data from the U.S. Census Bureau, state revenue from tobacco product sales taxes decreased in 2013 by 0.9 percent, to $17.0 billion. That decrease followed a 0.5 percent reduction in 2012. The National Taxpayers Union Foundation has found tobacco tax collections failed to meet initial revenue targets in 72 out of 101 recent tax increases.
Although 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. Tobacco taxes prop up government spending with an unsustainable revenue source. They are also highly regressive, unduly burdening moderate- and low-income individuals. According to the Bureau of Labor Statistics, consumer households earning less than $150,000 a year make 95.8 percent of tobacco expenditures.
Targeted taxes on products such as tobacco disproportionately harm low-income taxpayers while punishing local businesses. Increasing Wyoming’s tobacco tax would only further contract the market over time and create budget deficits taxpayers will eventually have to fill with additional tax increases.
The following articles provide more information about tobacco taxes.
Ten Principles of State Fiscal Policy
https://heartland.org/policy-documents/ten-principles-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
https://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 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
https://heartland.org/policy-documents/five-things-consider-raising-tobacco-taxes-review-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.”
Sin Taxes: Size, Growth, and Creation of the Sindustry
https://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 Pigovian social-welfare argument – tobacco tax revenues aren’t being used to help smokers, for example. 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.
E-Cigarettes Are Making Tobacco Obsolete. So Why Ban Them?
http://heartland.org/policy-documents/e-cigarettes-are-making-tobacco-obsolete-so-why-ban-them
Matt Ridley reports vaping works better than any other method of giving up smoking, examining several studies reaching that conclusion. With the success of vaping products, he asks, why are cities banning them?
E-Cigarettes Poised to Save Medicaid Billions
https://heartland.org/policy-documents/e-cigarettes-poised-save-medicaid-billions
In a new report from State Budget Solutions, J. Scott Moody finds e-cigarette use could create significant savings for state governments, especially in their Medicaid programs: “As shown in this study, the potential savings to Medicaid significantly exceeds [sic] the state revenue raised from the cigarette excise tax and tobacco settlement payments by 87%. As such, the rational policy decision is to adopt a non-interventionist stance toward the evolution and adoption of the e-cig until hard evidence proves otherwise.”
Peering Through the Mist: Systematic Review of What the Chemistry of Contaminants in Electronic Cigarettes Tells Us about Health Risks
http://heartland.org/policy-documents/peering-through-mist-systematic-review-what-chemistry-contaminants-electronic-cig
Electronic cigarettes are generally recognized as a safer alternative to combusted tobacco products, but there are conflicting claims about the potential health concerns these products warrant. This paper reviews the available data on the chemistry of aerosols and liquids of electronic cigarettes and compares modeled exposure of vapers with occupational safety standards.
Cigarette Tax Hikes Burn Hole in State Coffers
http://www.app.com/article/20081012/OPINION/810120325/1030/OPINION
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
http://www.budgetandtax-news.org/article/19564
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
http://www.ntu.org/main/press_issuebriefs.php?PressID=1001&org_name=NTU
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?
http://heartland.org/policy-documents/cigarette-taxes-and-smoking-will-higher-taxes-yield-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
http://heartland.org/policy-documents/cigarette-taxes-black-markets-and-crime-lessons-new-yorks-50-year-losing-battle
Patrick Fleenor examines New York’s half-century battle with cigarette black markets and related crime, documenting consumer responses to tax increases and discussing law enforcement and policy efforts to curb the negative side effects of high cigarette levies. Finally, he 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
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 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 authors’ 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 https://heartland.org/publications-resources/newsletters/budget-tax-news, 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.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
