TOPEKA, Kan. and CARSON CITY, Nev. -- It’s been nearly one month since Nevada’s cigarette excise tax increase went into effect, raising the average pack price from $5 to $6. The $1 per pack tax hike represents the state’s largest single cigarette-tax increase and its first tax hike since 2003.
Not surprisingly, tobacco retailers are concerned about what this means for business.
“I think it (cigarette use) will decline, it will decline substantially,” Steve Moran, director of business enterprise and economic development for the Reno-Sparks Indian Colony (a major tobacco player in the state) told the Reno Gazette-Journal. “This is a substantial increase (in taxes).”
Retailers in Kansas have expressed similar concerns after lawmakers enacted a similar excise tax increase in June, increasing cigarette taxes by 63% (from 79 cents per pack to $1.29 per pack).
The Kansas tax revenue is slotted to cover a $400 million budget deficit, while Nevada’s additional revenue will likely go towards a $1.3 billion increase in educational funding. However, Philip DeCicca, associate professor of economics at McMaster University, told Heartland.org that states like Nevada and Kansas might be overestimating the value of excise tax increases.
“Many states count on cigarette revenues to fund public health and other programs, as well as to bolster the general fund,” DiCicca said. “It is likely their revenues will not match their expectations.”
DeCicca added that cigarette taxes can backfire in several ways.
“People respond to [sin taxes] either by crossing borders or, as some [research] work shows, by smoking cigarettes harder with deeper inhalations,” DeCicca said. “In other words, smokers are rational and respond to incentives when they can.
Kansas retailers with stores near state borders told Heartland.org they were already noticing a decline in sales as smokers head to lower-taxed states like Missouri (where the state tax is just 17 cents per pack) and Oklahoma (where the excise tax is $1.03). Likewise, the only western states with higher cigarette tax rates than Nevada are Arizona ($2 per pack) and Washington ($3.025 per pack).
“If the tax difference is high enough and enough people live closely [to another state with lower taxes], one could imagine that Kansas will not gain as much revenue as it expected,” DeCicca said. “In general, cigarettes remain fresh for about three months, so a pack-a-day smoker could go and buy 90 packs, or nine cartons, for the price differential minus the cost of driving and how [much the] individual values his or her time. In some states a single trip like this could easily save $100.”
Michael LaFaive, director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, told Heartland.org the outflow of tax revenue should not be surprising.
“This was very clearly an expected outcome,” he said. “Taxpayers are not sheep lining up to be sheared. If they can find an equal or better product at a lower price, they’re going to seek it out.”