Willard Bishop: N.J. Tax Hike Driving Decrease in Demand

Cumulative cost to retailers estimated at $364.1 million since 1998

BARRINGTON, Ill. -- As reported in CSP Daily News, many retailers in New Jersey oppose Governor Jon Corzine's recent proposal to raise the cigarette tax for the fourth time in as many years. The proposal, which would increase the tax to $2.75 per pack, would make New Jersey's tax the largest in the nation. The tax hike would follow 70-, 55- and 35-cent increases over the last three years.

According to David Bishop, director at consultancy Willard Bishop, Barrington, Ill., while the national demand for cigarettes has decreased 17.9% between 1998 and 2005, [image-nocss] demand in New Jersey during the same time period declined by 47.1%. Based on further comparative analysis, it is likely that more than 60% of New Jersey's decline is driven by the escalating state cigarette excise tax rate. In fact New Jersey's state cigarette excise tax has increased by $2 per pack or 500% since 1998 to become the second highest in the United States at $2.40 behind only Rhode Island, which is currently at $2.46.

The incentive for cigarette consumers to avoid these high taxes is clear, said Bishop. The annual savings associated with shifting purchases from New Jersey to Delaware is over $900 currently, and it would exceed $1,000 a year if the proposed increase is approved, he said.

Recognizing that lower-income households are less mobile, the alternative is to buy via the Internet or buy smuggled cigarettes from lower-taxed states. Both of these alternatives can create even bigger consumer savings, he said.

The cumulative financial impact to the state budget and bondholders is estimated to be as high as $1,576.9 million dollars during the period between 1998 and 2005.

Breakdown of Revenue Loss:

State excise tax, $1,056.2 million State sales tax, $194.7 million Master Settlement Agreement (MSA) funds, $325.9 million. Total: $1,576.9 million

In New Jersey, the financial cost to retailers who are legally selling cigarettes is estimated at $364.1 million during this same period. Bishop, who also conducted the analysis, said, This equates to over $33,000 in lost gross profit dollars on an individual-store basis over an eight-year period, and that is a conservative estimate, because it doesn't account for the lost sales of additional products consumers purchase with tobacco in convenience stores.

Willard Bishop predicts that the current proposed state cigarette excise tax increase of 35 cents will decrease legal demand for cigarettes by 14.45% and the corresponding state tax excise revenue by 1.98% or $15.5 million dollars during the first fiscal year. Highlighting other consequences, he added, The increase will not only reduce excise revenue, but will also negatively impact state sales tax by nearly $11 million dollars and reduce the MSA payment state bondholders receive by approximately $23.6 million in year one.

He concluded, The impact of the proposed increase shouldn't come as a complete surprise since the increases associated with the last three rate changes have continued to shrink, indicating that the tax level is approaching the inflection point on the revenue curve. Our analysis simply highlights that the proposed increases cross that point, which means any further increases in the tax rate will most likely result in a reduction in revenue for the state.

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