1999 Cigarette Tax Debate Turns More On Crime Than Health

Concerns about cross-border differences harming merchants and a rise of smuggling contributed to the defeat of proposed cigarette tax increases in thirteen of seventeen states that considered such actions this year, partially shifting the nature of the debate from a health and revenue issue to one of crime and commercialism.

Maryland, New Hampshire and Wyoming passed the only statewide increases this year, while Alabama passed legislation to allow a specific county to raise its tobacco tax. Maryland raised its tax by 30 cents; New Hampshire and Wyoming by 15 cents.

In at least one of the fourteen states that rejected an increase (HI, IN, ME, MT, NE, NM, NY, OK, OR, SD, TN, VT, WV), the most convincing, and controversial, argument was bolstered by testimony from a national conservative lobbying group with ties to the tobacco industry.

In a presentation credited with persuading wavering Nebraska legislators this March, Michael Flynn of the American Legislative Exchange Council said Nebraska’s proposed tripling of cigarette taxes would lead to a mobster-controlled black market and the loss of millions of dollars in tax revenue.

Cigarette tax hike supporters dismissed the smuggling argument as a smokescreen for the tobacco industry — the five major tobacco companies contribute about five percent of ALEC’s $6 million annual budget, according to an ALEC spokesman. But experts say it has validity, evidenced by Michigan’s struggles with black market tobacco since tripling its cigarette tax in 1994.

According to Michigan law enforcement officials, cigarette smuggling dramatically increased in 1994 when the state tripled its excise tax to 75 cents a pack. Smugglers created a pipeline from states such as North Carolina and Kentucky, where the cigarette tax is only 3 cents a pack.

While Michigan’s tax is now the seventh highest, it was at that time the highest in the nation. And at the same time that Michigan raised its tax, the North Carolina legislature voted to eliminate its own cigarette tax stamps–making it impossible to tell where a pack of cigarettes originated. In 1996, South Carolina did the same.

Legal cigarette sales in Michigan fell by more than 25 percent from 1994 to 1997 even as smoking rates rose, according to Michigan Police Tobacco Team detective John Moore. In the same time period, cigarette tax revenue rose more than 20 percent in North Carolina despite declining smoking rates.

Smuggling had become big business.

With Michigan losing as much as 30 percent of the tax revenue from the $1 billion worth of cigarettes sold in the state, the 1998 legislature passed a law requiring a Michigan tax stamp on every pack sold. The impact was immediate.

The state collected $70 million more in cigarette tax revenue than the previous year. The state Office of Revenue and Tax Analysis estimates the stamps will generate more than $100 million in additional revenue in Fiscal 2000.

Michigan’s worries are far from over, however, as smugglers are finding high-tech methods of counterfeiting the state tax stamp. And with a cigarette tax rate still more than double any of its immediate neighbors, Michigan remains a target for smugglers.

“They don’t quit. They change their game,” Moore said. “There is just too much money to be made.”

New Hampshire legislators approved a cigarette tax hike this year despite tax differentials with neighboring states and in the face of concerns about smuggling.

Store owners near New Hampshire’s borders worried that the state would lose its tax advantage over neighboring Vermont, thereby losing New York and Vermont buyers. Owners on the other borders said the same thing about buyers from Massachusetts and Maine.

One study commissioned by legislators indicated that for each $1 in tobacco purchases, cigarette buyers spend $4.80 on other items.

In the middle of a budget crisis, and searching for ways to increase popular revenue streams, New Hampshire legislators approved the increase anyway.

In Alaska, the debate continues as to whether an increased cigarette tax has discouraged smoking, especially among youths.

At $1 dollar a pack, Alaska now has the highest cigarette tax in the nation. According to a study by the departments of Revenue and Health, that tax resulted in a 17 percent decrease in taxable cigarette sales.

While the report indicates that the tax helped bump Alaska’s monthly tobacco tax revenue from $1.5 million to $4.3 million, critics say the numbers could hide a burgeoning shift to black market cigarette sales.

But with no natural borders with other states, tobacco consumers in Alaska have looked to other means than U-Haul trucks full of contraband cigarettes.

According to law enforcement officials and an informal test by the Anchorage Daily News, the practice of ordering low-tax cigarettes over the Internet has blossomed.

Brett Fried, an economist at the Department of Revenue, acknowledges that the state has few ways to track illegal sales of the Internet, but insists that current revenue figures and smoking rates make sense.

Gov. Tony Knowles has given a grant to Alaska Pacific University to determine the impact of the increased tax on youth smoking. The report was expected July 1, but has not yet been completed.