State Budget Deficits Require Retail Action

Lawmakers likely to chase pandemic financial relief through tobacco product tax hikes
Budget Deficit
Photograph: Shutterstock

LAKEVILLE, Minn. — With governors across the country issuing stay-at-home orders and requiring partial or complete business shutdowns in response to the coronavirus pandemic, state governments have simultaneously experienced significant revenue shortfalls and increased spending. Unlike the federal government, which can incur budget deficits, states are required by their constitutions to balance their budgets every year.

As a result, the Center on Budget and Policy Priorities has issued an estimate of the revenue shortfalls in all 50 states for fiscal years 2020, 2021 and 2022. States could incur an aggregate revenue shortfall of $185 billion in fiscal year 2020, $370 billion in fiscal year 2021 and $210 billion in fiscal year 2022 for a total of $765 billion in lower tax and revenue collections over the three-year period, according to the estimate.

This means that every state could experience budget deficits in the hundreds of millions of dollars, with some states falling billions of dollars short, in comparison to regular projected revenue. With the potential for losing approximately 20% of their expected revenue, and in the event the federal government does not provide additional federal aid to replace some of the lost revenues, state governments will be faced with large spending cuts, significant tax increases, or a combination of both in 2021 and into the following years.

In the Crosshairs

While states impose taxes in a variety of ways—including income taxes, sales taxes and corporate taxes—one area that state lawmakers will likely focus on for raising additional revenue will be state cigarette and tobacco-product tax rates. This threat of cigarette and tobacco-product tax increases needs to be taken seriously by retailers because cigarettes and tobacco products make up a significant portion of in-store sales for the average convenience store.

Retailers need to be proactive and reach out to their state lawmakers ahead of the coming 2021 state legislative sessions. Communicating with lawmakers about the impact of higher cigarette and tobacco-product tax rates is critical to educate elected officials about the consequences of higher tax rates. Perhaps now more than ever, the budget shortfalls that states will be facing require retail businesses to contact the state lawmakers that represent the districts in which their stores are located and urge them to consider what may happen if cigarette and tobacco tax rates are raised.

The consequences of increased tax rates may include the following:

  • The regressive nature of cigarette and tobacco taxes on lower income individuals will be magnified.
  • Consumers will seek out lower priced sources of cigarettes and tobacco products in neighboring states, over the internet or from illicit markets.
  • Lower sales will result in lost retail income that currently supports retaining employees and keeping stores open.
  • States that increase cigarette and tobacco tax rates could collect less in excise tax revenue than before the tax increases, placing further pressure on budget deficits.

Retail Reputation

Being designated as an “essential business” and remaining open during the coronavirus pandemic has been a significant challenge, and raising tax rates will only negatively impact convenience retailers by putting more downward pressure on sales.

Now is the time for retailers to call and e-mail state lawmakers and express their concerns about future cigarette and tobacco-product tax increases. The contact information for state legislators is listed on each state’s legislative website. Taking a few minutes to make a phone call or compose an e-mail could have a positive impact on the eventual outcome of what is sure to be a number of bills introduced in 2021 to raise cigarette and tobacco product tax rates.

Thomas Briant is the executive director of NATO, a tobacco retailing association based in Lakeville, Minn. Reach him at info@natocentral.org.

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