At least in the near term, an economist says states can expect to continue
seeing healthy revenue streams when they decide to raise taxes on cigarettes
and other tobacco products.
“No state ever lost the bet of additional revenue when they raised their cigarette excise tax,” said Bruce Seaman, an associate professor of economics from Georgia State University, speaking at the Federation of Tax Administrators Tobacco Tax Annual Meeting Aug. 30 in Newport.
Seaman’s presentation was based on a report he published this May in State Tax Notes on the impact of a decision by the state of Georgia to raise its tobacco excise taxes for the first time since 1971. Titled “The Economics of Cigarette Taxation: Lessons for Georgia,” the study examined a number of claims made by both advocates and opponents of closing the state’s budget gap with a tax hike.
Over the first year, Seaman found that the 12-cent increase (to 37 cents per pack) had little impact on sales, even when considering the state’s proximity to the Carolinas, which have some of the lowest tax rates in the country.
He said cross-border shopping, though not trivial, “is nowhere near the severity” some tax hike opponents worry the effect may be. Even in areas where Seaman determined purchasers were more likely to benefit from trafficking (he analyzed data from towns with close proximity to any of the five states bordering Georgia, all with a lower tax), Seaman’s research found a very low effect on sales.
He even presented a map highlighting Georgia border towns where cancer death rates were highest (and where smoking is presumably a habit of many) and found that tobacco sales stayed mostly the same in a year-over-year comparison.
Seaman’s study concluded that Georgia had met its targeted revenue increases through the tax and that there was no threat of meaningful job loss in either the tobacco-growing or cigarette-manufacturing industries in the state.
The report did find that there would likely be some jobs lost in tobacco retail distribution (convenience store workers in border towns), but that loss would be no more than 0.1 percent of the state’s more than 686,000 retail employees. Seaman maintained that Internet sales, on which excise taxes are weakly enforced, remain a much stronger siphon on tax revenues.
Even with the raise in its tobacco excise taxes, Georgia, who’s rate ranked only 36th-highest in the country, is still far off the pace set by Rhode Island, whose smokers are among the nation’s highest-taxed.
According to the Federation of Tax Administrators, at the start of 2004, Rhode Island trailed only New Jersey when it came to the tax rates states set on cigarettes (the federal cigarette tax is 39 cents per pack). New Jersey put its per-pack tax at $2.05, with Rhode Island at $1.71. The 75-cent increase included in Rhode Island’s budget for 2005 will be the fourth year in a row the state has looked to tobacco sales to shore up its budget.
Next year, Rhode Island’s rate of $2.46 per pack, will rival only New York City’s rate. This year, the city imposed an additional $1.50 tax onto the state’s $1.50 rate. Connecticut and Massachusetts had their rates set at $1.51 at the start of this year. As of Jan. 1, the median excise tax rate for the 50 states and the District of Columbia was 60 cents.
As a side note, Seaman also examined the claim that excise taxes are a “regressive tax,” with smoking a habit that demographics have shown to be widest spread among people with low incomes and less than a high school education. Younger smokers and people with low incomes are expected to at least curb their consumption of tobacco products, but that group will still bear the greatest tax burden.
And as for realizing health benefits among the wider population, Seaman said data on that is less clear for the near term. He pointed out that even if a state were to fully realize the health benefits and greatly reduce smoking, it would be forced to “kiss their revenue increases away,” while likely seeing greater demands on nursing homes and pension plans as people live longer.
Tobacco tax administrators, as well as industry representatives from across the country, gathered at the Hyatt Regency Newport on Goat Island from Aug. 29 to Sept. 1 for their annual meeting to trade procedural tips, share enforcement methods and discuss the economics of cigarette taxes in a variety of states.
Other topics tackled over the course of the conference were last summer’s battle between Rhode Island government and a smoke shop set up by the Narragansett Indians, updates on U.S. and Canadian federal laws and talks featuring manufacturers and distributors.
