The Leaflet – States Consider Cigarette and E-cigarette Tax Increases

Published December 3, 2015

States across the nation are debating increasing cigarette tax rates to fix budget gaps. In 2105 alone, Alabama, Connecticut, Kansas, Louisiana, Minnesota, Nevada, Ohio, Rhode Island, and Vermont all increased their states cigarette tax rate. Unfortunately for state budgets, the National Taxpayers Union Foundation found that tobacco tax collections failed to meet initial revenue targets in 72 out of 101 tax increases from 2001-2011.

Supporters of increased cigarette tax rates often argue that an increased tax will result in fewer youths smoking and a healthier population.  However, current research indicates otherwise. A 2015 National Bureau of Economic Research study found that, “Youths have become much less responsive to cigarette taxes since 2005. In fact, we find little evidence of a negative relationship between cigarette taxes and youth smoking when we restrict our attention to the period 2007-2013.”

The Tax Foundations Director of State Projects Scott Drenkard said during a U.S. Senate on Finance hearing on July 29, 2014 that “56.9 percent of the cigarettes consumed in New York State in 2012 were smuggled into the state from other locales. Other states with substantial smuggling problems include Arizona (51.5 percent), New Mexico (48.1 percent), Washington (48.0 percent) and Wisconsin (34.6 percent).” Drenkard goes on to argue “tobacco taxes are the highest they have ever been in the United States. The federal rate currently stands at $1.0066 per pack of cigarettes, and state and local rates add as much as an additional $6.16 per pack (as in Chicago, Illinois). These combined rates are equivalent to a tax in excess of 200 percent in some locales.” The high taxation and differences in cigarette taxes across states can create incentives for sales in the black market.

Some states are also beginning to expanding tobacco taxes to e-cigarettes and vapor products despite them being a completely different product than combustible cigarettes. According to Heartland Institute Senior Policy Analyst Matthew Glans, “Research suggests e-cigarettes are particularly helpful for heavy smokers who have tried and failed to quit through traditional methods such as nicotine gum, the nicotine patch, and medication. Imposing excise taxes on vapor products is not justified from a public health perspective, and it removes a prime economic incentive for smokers to improve their health by switching to e-cigarettes.”

So-called “sin taxes” like these distort markets, reduce economic competitiveness, and encourage unsustainable increases in government spending while placing an excessive burden on lower-income taxpayers.

What We’re Working On

Budget & Tax
Research & Commentary: Wyoming Tobacco Taxes
Next year lawmakers in Wyoming will consider proposals to increase 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.

In this Research & Commentary, Senior Policy Analyst Matthew Glans warns that 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. Read more

Energy & Environment

Research & Commentary: Las Vegas Casinos Fight to Choose Electricity Suppliers
Three of Las Vegas’ biggest hotel-casino companies, which by themselves account for more than 5 percent of NV Energy’s total sales, are asking the Nevada Public Utilities Commission to allow them to purchase electricity from the energy supplier of their choice due over priced electricity. One reason for NV Energy’s high prices is state laws force the utility to purchase excess electricity from small solar producers at full retail prices, which are higher than its own generation costs and wholesale electricity prices. In this Research and Commentary, Policy Analyst Tim Benson argues “casinos, as well as all businesses and residents in Nevada, should be free to purchase electricity without draconian penalties from any company that offers it, and NV Energy should not be forced to purchase solar power above wholesale prices.” Read more

Health Care

Research & Commentary: Virginia Should Oppose McAuliffe Medicaid Expansion Plans
The Affordable Care Act (ACA), also known as Obamacare, allows states to expand Medicaid to cover individuals making up to 133 percent of the federal poverty level. Thirty states and the District of Columbia have chosen to expand their Medicaid programs under the ACA, and 20 states, including Virginia, have refused to do so.

Virginia Gov. Terry McAuliffe’s (D) previous attempt at Medicaid expansion, Marketplace Virginia, emulated Arkansas’ premium assistance model, but it failed to pass in 2014. McAuliffe told The Washington Post he will craft a plan conservatives will support to extend health care benefits to 400,000 uninsured citizens at no cost to the state. McAuliffe did not give any concrete details about his plan. Republican leaders speculated his new proposal would center on the creation of a bed or provider tax.

In this Research & Commentary, Senior Policy Analyst Matthew Glans argues Virginia legislators should continue to resist Medicaid expansion and instead reform their fiscally unsustainable program in ways that provide better care to enrollees and offer lower costs for taxpayers. Read more


Washington State’s Regressive Wireless Taxes are Still the Highest in the Nation
Ali Mollhoff, research assistant at the Washington Policy Center examines in this Heartlander article a recent study which found Washington State is once again the highest wireless tax state in the nation. Consumers in Washington pay a combined average wireless tax rate of 25.15%. 

Mollhoff compares these tax rates to Washington’s neighbors: Idaho and Oregon boast wireless tax rates of less than 9%, the two lowest in the nation. The national average is around 18%. “This isn’t just a Washington state problem; wireless taxes in most states across the nation are skyrocketing, considered by lawmakers as a quick, reliable and inconspicuous way to increase tax revenues.” Read more

From Our Free-Market Friends
The Buckeye Institute Releases New Report Showing 3 Ways to Expand Healthcare in Ohio
The Buckeye Institute released a new report this week promoting three ways to increase access to affordable healthcare in Ohio, benefitting low-income and underserved areas. The Buckeye Institute report titled Expanding Access to Healthcare in Ohio recommends three reforms including: relaxing restrictions on out-of-state physicians providing charity care, lifting certain regulations on Certified Nurse Practitioners, and providing continuing medical education credits for physicians who volunteer in underserved areas. Tom Lampman, research fellow at The Buckeye Institute and author of this new report states “Ohio needs to deregulate the way that physicians and nurses provide healthcare so that private charities, free clinics, and others can help our neediest communities.” Read more