Media Memorandum: Cigarette Tax Increases Remain a Reliable and Fair Source of Revenue for States

May. 29 2003

Washington, D.C. — As a growing number of states increase cigarette taxes to help close large budget deficits, the tobacco companies and their allies are resorting to increasingly desperate and deceptive scare tactics to convince policy makers – and the media – that cigarette taxes unfairly burden smokers and are not a reliable source of revenue. The Lorillard Tobacco Co. has gone so far as to run ads claiming cigarette tax increases benefit organized crime.

These tobacco company arguments ignore the following key facts:

  • Every single state that has significantly increased its cigarette tax rate has enjoyed substantial increases in state tobacco tax revenue – despite the smoking declines prompted by the tax increase and despite any related tobacco tax evasion by continuing smokers.
  • Economic studies have consistently found that tobacco tax evasion and cigarette smuggling is a much smaller problem than the tobacco companies allege – and there are simple steps that states can take to make the problem even smaller.
  • The average federal and state tax on a pack of cigarettes is $1.08 – and even in the states with the very highest cigarette tax rates totals only $1.90. In contrast, the U.S. Centers for Disease Control and Prevention estimates that each pack of cigarettes sold in the U.S. costs the nation an estimated $7.18 in smoking-caused health care costs and lost productivity. Clearly, current cigarette taxes do not come close to covering the tremendous costs that tobacco use imposes on all taxpayers.

The real reason the tobacco companies are so vigorously opposing state cigarette tax increases is because those increases have been working just as the science and experience predicts they will to prevent kids from starting to smoke and help current smokers quit. That is great news for parents, kids and the states, but it is bad news for tobacco companies' bottom lines. In recent months, the major tobacco companies have even admitted that their cigarette sales and profits have dropped because of cigarette tax increases.

For example, in an April 25, 2003 company press release, R.J. Reynolds' CEO Andrew J. Schindler said "RJR's profitability continues to be adversely affected by the growth of deep-discount brands, high levels of competitive promotion spending, and the effects of state cigarette excise tax increases." Given the effectiveness of cigarette tax increases in reducing smoking, it's no wonder the tobacco industry is opposing them so vigorously -- and why the nation's leading public health organizations, including the American Cancer Society, American Heart Association, American Lung Association, and the Campaign for Tobacco-Free Kids, are fighting so hard to win their approval. We want to take this opportunity to respond to some of the tobacco industry's self-serving arguments.

Higher State Cigarette Taxes Are Increasing Revenues and Reducing Smoking Despite Tobacco Industry Claims of Rampant Crime Costing States Revenue

Historically, every single state that has significantly increased its cigarette tax has enjoyed substantial new revenues, while reducing smoking levels and related health care costs. Put simply, in every state, the revenue losses from fewer cigarette sales were more than made up for by the increased revenues per pack. Since January 1, 2002, 29 states, the District of Columbia and Puerto Rico increased cigarette taxes. The preliminary evidence from these jurisdictions confirm that cigarette tax increases continue to deliver the expected benefits of higher revenues and reduced smoking.

Jurisdictions showing substantial increases in revenue despite significant pack sales declines include Massachusetts (75-cent increase to $1.51 per pack), Michigan (50-cent increase to $1.25 per pack), Nebraska (30-cent increase to 64 cents a pack) and Rhode Island (32-cent increase to $1.32 per pack). Michigan, for example, collected $104 million more in cigarette tax revenue in the last five months of 2002 compared to the year before despite a 15.5 percent reduction in cigarette pack sales. Nebraska's 2002 tax increase has produced $10 million more in additional revenues between October 2002 and April 2003 than in the same period the year before. Even in New York City, where the combined state and local cigarette tax rate has increased to $3.00 per pack, the city's tax increase from 8 cents to $1.50 per pack is on track to bring in a quarter of a billion dollars in new revenue over the first year despite sharp declines in cigarette sales.

Besides the significant drops in pack sales, news reports have also documented considerable anecdotal evidence from around the country that the recent cigarette tax increases are spurring smokers to quit. Calls to smoking cessation Quitlines jumped by more than 50 percent in states such as Illinois and Michigan in the first months after they increased cigarette taxes, and the American Cancer Society reported a 65 percent increase last July, the first month after a cigarette increase took effect, in calls from New Jersey and New York to its Quitline. Smoking cessation support groups in New York City reported large increases in membership after the cigarette tax increase took effect, with one reporting a doubling of membership, according to the Associated Press. Sales of nicotine patches and gum on the web site drugstore.com were up 43 percent the second week in July, after many state cigarette tax increases took effect July 1, compared with sales in the second week of June, according to The New York Times.

These results are consistent with historical experience and scientific studies. Studies show that every 10 percent increase in the price of cigarettes will reduce youth smoking by approximately seven percent and overall cigarette consumption by three to five percent. Even a slight decrease in smoking makes a difference since one-third of kids who start smoking and one half of continuing adult smokers will eventually die from tobacco-caused disease.

Tax Avoidance is Overstated

The fact that every state (and city) that has significantly increased its cigarette tax rate has enjoyed substantial increases to its tobacco tax revenues directly contradicts the cigarette companies' assertion that cigarette tax increases will fail as revenue raisers because of cigarette smuggling, cross-border cigarette sales and other tax avoidance practices by smokers. In addition, studies have shown that smuggling and tax-avoidance is a relatively small problem, affecting less than ten percent of all cigarette sales nationwide. More specifically, a survey right after California's 50-cent cigarette tax increase in 1999 found that no more than five percent of all continuing smokers were actually engaging in cross-border or internet purchases or other tax evasion efforts -- and many smokers who initially engage in tax avoidance strategies after a cigarette tax increase soon return to the greater convenience of buying their cigarettes by the single pack from nearby convenience stores or gas stations, and paying all applicable taxes.

Nevertheless, if smuggling and tax evasion were reduced further, states would gain even more cigarette tax revenue. But rather than encourage new state efforts to block cigarette smuggling by organized crime, reduce illegal sales of tax-free cigarettes, and otherwise discourage tobacco tax evasion, the big tobacco companies argue that states should stop raising their cigarette tax rates or even cut them back. In other words, the big tobacco companies are making the ludicrous argument that states should give in to cigarette smugglers and other lawbreakers rather than crack down on them. Would they make the same argument about smugglers and dealers of illegal drugs? To prevent and reduce cigarette smuggling and tax avoidance, the states should strengthen and better enforce laws against smuggling, and those few states that still have incredibly low cigarette tax rates to increase them. If these lowest-tax states – including VA, KY, and NC with cigarette tax rates of only 2.5, 3, and 5 cents, respectively -- raised their rates closer to the national average, the supply of low-cost cigarettes for interstate smuggling would largely disappear. However, while professing concern about cigarette smuggling, the tobacco companies are aggressively opposing even small increases to the incredibly low cigarette tax rates in these supplier states.

Tobacco Taxes Fall Far Short of Tobacco's Toll

The cigarette companies also argue that smokers are being unfairly taxed. But average total federal and state cigarette tax per pack is only $1.08 per pack, compared to the CDC estimate that nationwide smoking-caused healthcare and productivity costs $7.18 per pack. The fact is that low cigarette taxes are unfair to nonsmokers who must help pick up the tab for tobacco-caused health care costs and other smoking-caused costs. The CDC estimates total annual public and private health care expenditures caused by smoking at more than $75 billion. This amount includes $23.5 billion in smoking-caused costs paid for by state Medicaid programs – and rising Medicaid expenditures have been a key component of many states current budget problems. Overall, U.S. households pay, on average, $550 per year just to cover federal and state government smoking-caused expenditures. Clearly, current state cigarette taxes revenues do not come close to matching the massive smoking-caused costs that burden every state.

Because of space constraints, this memorandum does not address the big cigarette companies' many other arguments against state tobacco tax increases. For a list of those arguments and a clear and concise presentation of their shortcomings, please see the Campaign for Tobacco-Free Kids factsheet at http://tobaccofreekids.org/research/factsheets/pdf/0227.pdf.

A new study by Research Triangle International, "State Cigarette Excise Taxes: Implications for Revenue and Tax Evasion," is available at http://www.rti.org/pubs/8742_Excise_Taxes_FR_5-03.pdf. More information about state cigarette tax increases and the benefits from raising them can be found at http://tobaccofreekids.org/reports/prices. If you have any questions or would like additional information, please call Tony Iallonardo at 202-296- 5469.

 

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