Raising Taxes on Tobacco. More Smuggling or More Revenue?

Proponents of tax increases on tobacco say more revenue.  Opponents, unsurprisingly, say more smuggling.

There is a California ballot proposal that mirrors a legislative effort by Los Angeles Senator Kevin De Leon that would raise the current $0.87 per pack tax by $2.00.  This effort follows on the heels of the defeat of Prop 29, which would have raised tobacco taxes, that narrowly lost in 2012.  The $0.87 tax has been in place since 1998.

The argument made by the proponents of the tax increase was made by Danny McGoldrick, vice president of research for the Campaign for Tobacco-Free kids.  “Every state who [sic] has passed this tax has had an increase in revenue and decrease in smoking,” McGoldrick said. “When people quit smoking, they still spend that money. This doesn’t put convenience stores out of business.”

What are the facts?  We have some new information since the Prop 29 fight, let’s see what it says.

TurboTax has looked at the impact of tobacco taxes on cigarette imports by state.  Not surprisingly, states that have high taxes and low tax neighbors have high rates of cigarettes being “imported” into the state.  New York State, with a tax of $4.53 per pack leads the nation with 61% of cigarettes consumed being smuggled into the state.  California’s neighbor to the east, Arizona is #2 on the list at 54% “imports” because of their $2.00 per pack tax.

California, with their $0.87 tax currently is seeing about 36% of cigarettes “imported”.

Would increasing the tax to $2.87 make a difference?  That increase would immediately make California’s state tax rate higher than all of its neighbors, including currently high-tax Arizona.  Neighboring taxes are as follows:  Oregon, $1.18; Nevada, $0.80; Idaho, $0.57; Colorado $0.87.  In the region, only Washington State would be higher at $3.025.

There is actual data available today on states that have raised their tobacco taxes and what the effect has been.

New York State changed their tax laws with respect to cigarettes sold on Indian Reservations.  They expected an increase of $130 million from the change.  They got exactly zero.

Massachusetts recently raised their cigarette tax from $2.51 to $3.51, and that’s only one penny higher than the tax in Rhode Island.  The result?

From August through October — the first three months that the higher Massachusetts tax was in effect — Rhode Island collected $2.7 million more in cigarette tax revenue than state officials expected.

The state [Rhode Island] since has raised its cigarette-tax revenue estimate by $5.6 million, or 4.3 percent, for the fiscal year that began July 1. But, should the August-through-October trend hold true for the rest of the fiscal year, the increase could be closer to $10 million.

An immediate outflow of up to $10 million in tax revenue for a one-cent increase.

Back to our question for the day.  Will a $2.00 per pack tax increase drive an increase in tax revenue or will it increase smuggling?  The answer is likely both.  The state will end up with more tax revenue, just not as much as they’re projecting, and smuggling will most likely increase dramatically.

The other problem for California is that the legislature’s insatiable appetite to increase taxes in every area of life is already driving people out of the state.  This new cigarette tax is just one more pebble on the pile.  Will $2.00 per pack drive a million people out of California?  No.  Will the tax increase reinforce the idea that the legislature is willing to tax anything that moves?  Yes.  That perception, and it’s a very real perception, is driving businesses out of state and keeping new business from moving to the Golden State.

In closing, listen to Travis H. Brown, the author of “How Money Walks”, talk about how state taxes impact state growth.  The California legislature should pay close attention to this.

See Video at this link