Last year the entire nation served as witness to a disturbing and haunting scene involving the alleged sale of black-market cigarettes.
Americans played and replayed a video showing a New York City police offıcer placing Eric Garner in a chokehold and wrestling him to the ground on suspicion of selling untaxed cigarettes. Garner’s fınal words, “I can’t breathe,” became the rallying cry for protesters outraged over alleged police brutality and racial injustice.
Some commentators, however, saw another culprit at work in the fatal confrontation: cigarette taxes that alone ring up at $5.85 per pack in New York City—as high as actual retail prices in parts of the country—and the pervasive smuggling those taxes help sustain.
These issues surely weighed on the minds of lawmakers in other states with tobacco tax increases on the line last year, says Wells Fargo analyst Bonnie Herzog.
“A lot of these states that are becoming more educated on the end result of high taxes are recognizing it’s probably not the ideal solution to take the excise taxes up on cigarettes dramatically,” Herzog says. “Not only do they not get the increased revenue, they have increased crime.”
Indeed, efforts to increase tobacco taxes largely failed at the state level last year. Out of 22 states pondering such legislation, only Vermont raised taxes on cigarettes in 2014. The year before, only two out of 28 states enacted bills to increase tobacco taxes.
An improving economy and a desire by lawmakers to avoid election-year tax increases likely contributed to the rejection of tobacco tax measures in 2014, says Thomas Briant, executive director of Minneapolis-based NATO. But something with long-term ramifications might also be afoot in the downward trend.
“Legislators are beginning to realize that taxing cigarettes and tobacco products is reaching a point of diminishing returns,” Briant says.
Net state cigarette tax collections reached a high of $17.1 billion in fiscal year 2011 and then declined over the next two years, according to The Tax Burden on Tobacco, an annual report compiled by the Arlington, Va., consulting firm Orzechowski and Walker. By fiscal year 2013, state taxes had fallen 3.5% to $16.5 billion. Federal tobacco taxes declined 9.0% from a high of $16.6 billion in 2010 to $15.1 billion in fiscal year 2013.
Jonathan Ketchum, senior vice president of Odessa, Texas-based Alon Brands, which operates more than 300 7-Eleven-branded stores in Texas and New Mexico, believes lawmakers are cooling to the temptation of “sin taxes” because of consumer backlash and a resulting decline in revenues. “Finally,” Ketchum says, “states are wising up.
“The real world does not operate in a vacuum,” he continues. “Unfairly high tobacco tax increases lead to more black-market tobacco purchasing. This usually leads to an increase in criminal activity. States also tend to lose revenue to bordering states that have cheaper taxes. And there is a breaking point where consumers will just stop purchasing.”
Black-Market Blues
In recent years, big jumps in excise taxes have been pushed as a way to bolster government coffers while giving smokers a punitive incentive to quit.
And while the additional tax revenue has gone more for items other than health and smoking-prevention programs, higher street prices have succeeded in curbing smoking rates.
The Centers for Disease Control and Prevention reported last November that cigarette smoking among U.S. adults declined from 20.9% in 2005 to 17.8% in 2013, a drop of an estimated 3 million smokers.
But that figure may not paint the full picture. Jim Calvin, president of the New York Association of Convenience Stores (NYACS), says only a small portion of falling cigarette sales in his state can be attributed to a decline in smoking. That, he says, is evident in the proliferation of the black market.
State excise taxes on cigarettes vary widely from state to state, from 17 cents in Missouri to $4.35 in New York. A recent report by the Mackinac Center for Public Policy, a free-market state policy group based in Michigan, found that nearly three out of five cigarettes consumers in New York were smuggled in from lower-tax states.
“Smokers fed up with tax-inflated cigarette prices can readily find their cigarettes somewhere else: on the street, over the Internet, Indian reservations, whatever that might be,” Calvin says. “There is a thriving black market for cigarettes that is ready and willing to serve smokers who refuse to pay higher taxes.”
Combined with sales taxes, state and local taxes in New York represent two-thirds of the retail price of a pack of cigarettes, he says. Depending on the brand, it can cost $10 to $13 for a pack of cigarettes in New York City. Not only have retailers seen dramatic drops in cigarette sales since New York City raised its cigarette tax from 8 cents to $1.50 in 2002, but sales of ancillary products also have tumbled as smokers stopped their frequent visits, Calvin says. The effect on convenience stores has been devastating.
“What happened here in New York, each time the state would sharply increase the tax rate, there would be an enormous drop in cigarette sales the following month—and it wouldn’t come back,” Calvin says. “Over time, our members have lost anywhere from 50% to 80% of their cigarette volume.”
A study by Management Science Associates (MSA), Pittsburgh, similarly found that after excise tax rates jumped in metropolitan Chicago, cigarette sales moved to surrounding counties. In a way, consider this akin to drifting from a snowstorm: The snowfall may be the same, but drifts give the impression of more snow in one spot and less in another.
“This has been proven time and time again,” says Don Burke, MSA senior vice president. “When one taxing authority increases their taxation on tobacco products, the volume level then shifts to surrounding areas where the overall prices of those tobacco products would not be as high.”
Calvin believes improvement in the economy is the main reason states are backing away from cigarette taxes as solutions to budget gaps right now. He’s hopeful the lull turns into something longer-lasting.
“But it may turn out as soon as there’s another turn in the economy and states find themselves once again with financial challenges, cigarette taxes will take center stage,” he says.
CONTINUED: What Will Be the Next Tobacco?
The Next Tobacco?
Waning interest in tobacco taxes might be due in part to activists moving on to other fights, says Jeff Lenard, vice president of strategic industry initiatives for NACS, Alexandria, Va.
“There’s more funding, there’s more passion around a few other ‘new tobaccos’ than current tobacco,” he says. Whether the “next tobacco” is sugar, fat or electronic cigarettes, however, the c-store remains squarely in the middle of the battleground.
Several states, including Indiana, Nevada, New Mexico and New York, introduced proposals early in 2015 to tax e-cigarettes or vapor products. Last year, Briant says, 16 states considered bills to assess a tax on e-cigarettes or vapor products, but only one was enacted. North Carolina lawmakers approved a 5-cent-per-milliliter tax on liquid nicotine.
Ketchum of Alon believes e-cigarettes and vaping are likely candidates for taxation. States that are ahead of the curve might realize a benefit because “like the very early cigarette tax hikes, it stands a better chance of being a tax revenue enhancer,” he says.
Herzog agrees that more taxes on e-cigarettes and vaping products are likely forthcoming. But she believes they will be less onerous than taxes on combustible cigarettes because of potential reduced health risk. She also expects more cigarette smokers to continue to shift to vapor and e-cigarettes.
“I am still of the belief that consumption of vapor products will surpass consumption of combustible cigarettes in the next decade,” she says.
In Front of Soda Taxes
Last fall, Berkeley, Calif., became the first city in the United States to enact a tax on sugary drinks, including soda. A similar measure in nearby San Francisco failed to get the required votes. Proponents of the measures contended that soda and other sugary drinks are major contributors to the nation’s epidemic of obesity.
Herzog expects states and municipalities to continue to pursue soda taxes, something that would have been unlikely even just five years ago. But she also believes the beverage industry is already out in front of the issue.
“Any efforts to raise taxes will be contested,” she says. “The industry has sound arguments as to why [opposing the tax] would make sense.
“It’s not a slam-dunk. I think there could be more noise around it and discussion around it, but ultimately the passage of these higher taxes on sugar will be more difficult” than tobacco taxes, Herzog says.
Illinois Democratic State Sen. Mattie Hunter led an attempt last year to raise taxes on distributors of bottled sugary drinks by a penny per ounce. Although the measure failed to pass out of committee, Hunter says she isn’t giving up on the Healthy Eating and Active Living (HEAL) Act, calling it one of her top legislative issues for 2015. She said the measure would raise an estimated $600 million annually to support programs and services to fight obesity and diabetes.
“We want people to make healthier decisions at the convenience store,” she says. “In many areas, especially on Chicago’s South Side, the local convenience store is a person’s only access to food.”
And where is Hunter looking for evidence that higher taxes can change consumption habits? To tobacco. The decline in cigarette sales “proves the taxes worked,” she says.
“Sugary beverages sell themselves quite like cigarettes have for decades. They are cheap, marketed to kids, found everywhere and are deeply tied to our American culture,” Hunter says.
“Cigarettes were, too, until people took on Big Tobacco.”
Herzog believes those looking to take on soda, however, might find this fight more difficult than the fight against tobacco. Many more Americans would feel the pain of taxes on sugary drinks, she says, making people more likely to oppose such taxes.
CONTINUED: Proposed 2015 Tobacco Tax Legislation
Proposed 2015 Tobacco Tax Legislation
Indiana: SB 384 would tax electronic cigarettes at 0.83 cents per milligram of nicotine per milliliter.
Kansas: Gov. Sam Brownback has announced a proposal that would nearly triple that state’s cigarette tax, from 79 cents per pack to $2.29 per pack.
Kentucky: HB 132 would increase the state excise tax on cigarettes by $1 a pack, bringing the tax to $1.60. It would also raise taxes on snuff, chewing tobacco and other tobacco products.
Nevada: SB 79 provides for the regulation and taxation of liquid nicotine at 30% of the wholesale price.
New Jersey: AB 2021 would reduce the cigarette tax by 30 cents per pack. AB 1944/SB 1213 would tax tobacco products at 90% of the wholesale price and moist snuff at $2.25 per ounce. AB 1308 would tax little cigars at the same rate as cigarettes (13.5 cents per little cigar)
New York: SB 722/AB 296 would tax electronic-cigarette cartridges as tobacco products. SB 702 proposes amending the defınition of tobacco products to include any product containing tobacco or nicotine intended to be consumed. It also would increase the OTP tax rate to the higher of 95% or $3.63 per ounce for moist snuff, same as cigarettes for single-unit tobacco, loose tobacco and cigar 5-packs.
Oregon: D 2565 would raise the tax on cigarettes from $1.31 per pack to $2.56 per pack and impose a floor tax on dealers for holding cigarettes. D 317 would increase the tax on cigarettes from $1.31 per pack to $3.15 per pack. D 321, D 322, D 328, HB 2160, HB 2162 and SB 14 would allow counties and municipalities to impose taxes on cigarettes and tobacco. HB 2066, HB 2166 and HB 2555 would increase the cigarette tax and provide for distribution of revenue.
Utah: Gov. Gary Herbert has proposed taxing e-cigarettes in a way “similar” to taxes on cigarettes and other tobacco products.
Virginia: HB 1590 would increase the tax on cigarettes to $2 per pack, raise the tax on roll-your-own from 10% to 60% of manufacturer’s sale price and raise the tax on loose-leaf tobacco from 21 cents to $1.26 for every 4 ounces. HB 1994/SB 784 would allow counties to impose a local cigarette tax not to exceed 5 cents per pack or the amount levied under state law.
Washington: Gov. Jay Inslee has proposed raising the cigarette tax by 50 cents and levying a tax on e-cigarettes and vapor products at 95% of the taxable sales price.
Wyoming: D 316 would increase the tax on cigarettes from 60 cents per pack to $1 per pack. OTP taxes would jump from 20% to 33% of the wholesale purchase price.
Sources: Legislative Monitor, National Association of Tobacco Outlets
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.