The State of Cigarette Taxation
CHICAGO -- More than two dozen states have either raised or are considering raising cigarette taxes by as little as 4 cents to as much as a dollar per pack, says a report in the Chicago Tribune.
Higher tobacco taxes are expected to create problems for many states because of increased cigarette smuggling and the proliferation of more than 100 Internet cigarette sales operations such as Mybutts.com and Smokemcheap.com, where smokers can buy their favorite brands without paying state taxes, the report says.
The result, according to tax and budget analysts, is that many states likely won't collect the amount of money they have forecast to balance their budgets. The amount of uncollected revenue could run into the billions of dollars.
"You're going to see increased bootlegging and everyone knows that will happen," David Brunori, a contributing editor of State Tax Notes, a nonprofit publication in Arlington, Va., told the newspaper. "The problem is that in many states, they've really been jacking the taxes up, and it's unfortunate in many respectsâ€¦. It's a silly way to raise revenue because you're betting on people continuing to smoke to raise your revenue projections."
At least five states--New York, Connecticut, Maryland, Nebraska and Utah--have boosted cigarette taxes this year, says the Tribune, citing information from the National Conference of State Legislatures. The New York tax rose to $1.50 per pack, from $1.11, while the Connecticut tax rose to $1.11, from 50 cents per pack.
Last week, the Massachusetts House of Representatives approved a $1 per pack increase, raising the tax to $1.76, which would be the nation's highest.
A Missouri coalition of public health groups submitted petition signatures last weekend placing on the November ballot a proposal asking voters to tack 55 cents onto the current 17-cent-per-pack cigarette tax.
Ohio is considering a 200-percent cigarette tax increase, to 51 cents. In Illinois, state Senate Republicans have proposed raising the cigarette tax to 75 cents per pack, from 58 cents.
The push for higher taxes has been brought about by the worst state budget crisis in a decade, the report says. At least 40 states and the District of Columbia have reduced or plan to reduce spending this year, according to the National Conference of State Legislatures, and most states forecast continuing problems in the next budget year.
Cigarette taxes are politically popular because they are supported by anti-smoking and public health advocates. Politicians like such "sin taxes" because they are viewed by some as a more palatable alternative to raising income or sales taxes, the Tribune says. But they are often not a reliably predictable source of income, it adds. Last fall Washington voters approved a 60-cent increase in the cigarette tax, boosting the level to $1.43 per pack, effective January 1. As predicted by the Washington State Economic and Revenue Forecast Council, cigarette sales dropped 9 percent in January. The falloff in February and March--27 percent and 24 percent, respectively--was greater than expected, said Bret Bertolin, the council's senior economic forecaster.
Cigarette smuggling has long been a revenue drain for some states and cities. In Oregon, the cigarette tax is 68 cents, offering an attractive alternative to Washington. New York Mayor Michael Bloomberg said smuggling costs his city $40 million a year in lost tax revenues. The lure of buying cigarettes in Virginia, where the tax is 2.5 cents, will almost certainly increase because Maryland raised the tax to $1 per pack, from 66 cents, the paper says.
In New York last month, an Indian nation began setting up tobacco kiosks in some Buffalo-area convenience stores allowing the electronic mail ordering of tax-free cigarettes. This occurred as the state began to implement its new $1.50 per pack cigarette tax. The Yellow Goose c-store chain allegedly had kiosks in four stores until late April, when the state advised them that they as the retailer would be liable for payment of tobacco taxes, another industry source said.
Internet sales, which offer cigarette cartons free of state taxes, seem to be contributing to the decline in state cigarette tax revenue, adds the paper. A report from Forrester Research Inc. predicted that states would lose $1.4 billion in tax revenue by 2005 as smokers spend $5 billion on tobacco products online, or 15 percent of total tobacco sales. The Forrester report said Internet retailers that operate on Indian reservations "are not compelled to collect state sales or excise taxes; 67 percent of the top online tobacco retailers are located on Indian reservations," it said.
Anticipating the threat from the Internet, mail order and telephone sellers offering tax-free cigarettes, the New York Legislature passed a law in 1999 banning the sale of cigarettes to consumers by out-of-state businesses. But a U.S. District Court judge last June ruled the law an unconstitutional violation of commerce protections.
Mark Haas, who directs Michigan Department of Treasury's Office of Revenue and Tax Analysis, told the newspaper that the lure of purchasing tobacco products over the Internet will only grow. "When you have a situation where somebody can sell cigarettes for a buck-fifty less per packâ€¦and if you have somebody who smokes three packs a day, he can save about $1,500 a year. Now you have a huge incentive for an individual to do something," Haas said. "And it becomes a growing concern as these (tax) rates get bigger."