Tobacco Tax in NY Highest in Nation

When it comes to New York, there are some certainties regarding government. Spending relentlessly rises, with any talk about even a bit of restraint being met with cries of catastrophe. Taxes are high and go relentlessly higher.

Indeed, New York's governmental burdens rank among the weightiest in the nation. For example, on the 2009 "Small Business Survival Index," which ranks the states and District of Columbia according to their public policy climates for entrepreneurship and small business, New York came in at 48, or fourth worst.

And now as state legislators wrestle with an expected deficit topping $9 billion, and with a budget nearly three months late, lawmakers late on June 21 jacked up the state's cigarette tax by 58 percent - from $2.75 per pack to $4.35. That means New York will have the highest state tax in the nation...

Read the rest of the SBE Council Fact of the Week here.

Tobacco Taxes in New Jersey and Pennsylvania – Up, Down, What?

Never let the facts get in the way of jacking up taxes.

Unfortunately, too many politicians think this way. They ignore the economic realities of higher taxes, and just plow ahead with proposed increases.

Just consider the following from a March 5 Philadelphia Inquirer story:

An odd thing happened the last time New Jersey raised its cigarette tax: It lost money.

According to advocates for lower taxes, that's because New Jersey smokers have cheaper purchase options nearby in Pennsylvania and Delaware, or online.

Pennsylvania also saw revenues fall when it last raised cigarette taxes.

Still, with both states facing mounting budget gaps, Gov. Rendell has proposed a cigarette tax increase and Gov. Corzine is considering one for the spending plan he will introduce Tuesday…

Gregg Edwards, president of the Center for Policy Research of New Jersey … pointed to New Jersey's recent revenue and cigarette sales. The state raised its cigarette taxes in fiscal years 2003, 2004, 2005 and 2007. In the first three instances, sales shrunk but revenue grew.

But after the last increase, which at the time gave New Jersey the highest cigarette tax in the nation, collections fell from $788.6 million to $770.5 million. Estimated revenues for fiscal year 2008 are $775 million, below the peak of fiscal year 2005…

Pennsylvania, too, saw revenue slide as taxes rose. Rendell raised cigarette taxes 35 cents in 2004. At first the commonwealth saw a modest income bump, but in the first full fiscal year after the tax hike, cigarette tax revenue fell by $72 million, roughly 8 percent. Revenue has never gotten back to fiscal 2004 levels, when the increase first hit.

What’s the deal? A big chunk of sales are moving underground and across state borders to avoid higher taxes. That also means lost businesses to small retailers. Combine this with the general decline in smoking, and keep in mind that all of the government programs that tobacco taxes are supposed to pay for keep on growing. This, of course, means other tax increases have been imposed, or are going to be imposed.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

More Bad Budget Ideas in the States

Kentucky ranked a middling 23rd on the latest “Small Business Survival Index,” which ranks the states according to their public policy climates for entrepreneurship. It looks like lawmakers want to inch the state into the lower half on the Index, making the state more costly to do business.

The Courier Journal reported on February 7 that Kentucky lawmakers were considering an increase in the state’s tobacco tax of 30 cents per pack of cigarettes, which would be a 100 percent increase.

In addition, higher taxes on alcohol are being pushed. One option would be to extend the state’s 6 percent sales tax to alcohol sales at package stores, or upping the tax at the wholesale from 11 percent to 25 percent.

According to the story:

According to preliminary LRC estimates, a 30-cent increase in the cigarette tax would generate about $50 million during the remainder of this fiscal year and $102 million in fiscal 2009-10.

Rep. Rick Nelson, D-Middlesboro, said his bill to raise the wholesale tax on alcohol to 20 percent would generate about $67 million a year. Applying the sales tax to package alcohol sales would raise an estimated $50 million annually.

Can this be stopped? Well, it was reported:

Any bill raising taxes this year will require approval by three-fifths of the members in each chamber -- 60 votes in the 100-member House and 23 in the 38-member Senate…

But Sen. Damon Thayer, R-Georgetown, said he hasn't counted votes and doesn't know if the tax increases would clear the Senate, even with leadership backing the legislation. "I'm not going to vote for it," Thayer said. "I don't think we should be raising taxes in a bad economy."

State Senator Thayer, of course, is correct. Higher taxes mean higher costs for consumers and businesses. Last time I checked, that, in fact, is not good for the economy.

For good measure, keep in mind that the general decline in smoking means that actual revenues rarely meet revenue projections when tobacco taxes are hiked. That means other taxes will have to rise at some point.

None of this is good for the state’s competitive position.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Obama’s First Tax Hike

It’s extremely early in the Obama administration, yet, the President just signed his first tax increase into law.

The bill expanding the State Children’s Health Insurance Program (SCHIP) passed the House initially by a 289-139 margin. The Senate’s amended version passed 66-32, with the House approving it by a 290-135 vote. Then came the President’s signature on February 4.

This legislation expands government spending on health care, by another $33 billion on SCHIP through the end of FY2013, according to the Associated Press.

To pay for this, the federal excise tax on a pack of cigarettes was jacked up from 39 cents per pack to $1.01. That 62-cent increase (the House originally called for a 61-cent increase) amounts to a 159 percent increase in the tax.

What will be the results?

First, further expanding government’s involvement in health care means that costs will be pushed even higher, since third party payments mean that health care providers and consumers care little about prices and utilization, and since government cares little about how taxpayer’s dollars are spent.

Second, the higher federal excise tax will hit small retailers hard due to lost sales, lost foot traffic, fewer consumer dollars left for other purchases, and expanded underground purchases.

Third, law enforcement will have to deal with expanded smuggling and counterfeiting by all kinds of criminal groups.

Fourth, other taxes eventually will have to be increased, as revenues from the excise tax fall short of expectations due to the trend toward reduced smoking and increased underground purchases.

That’s the story of President Obama's first tax hike.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Stop the Federal Tobacco Tax Hike

Unfortunately, it is not taking very long for the Democrat-controlled U.S. House of Representatives to try to start hiking taxes. Can you help to stop them?

As various media reports have noted, the U.S. House of Representatives is getting set this week to vote on a bill expanding the State Children’s Health Insurance Program (SCHIP). The bill would wind up boosting the number of individuals enrolled in the program from 6.6 million to more than 10 million.

That, of course, means rising costs for taxpayers. The proposal would increase the federal tobacco tax, with the levy on a pack of cigarettes jumping by 156 percent, from 39 cents to $1.

There are many problems with this tax increase. In a January 9 letter to each member of the House of Representatives, SBE Council President & CEO Karen Kerrigan explained four reasons for opposing this tax increase:

First, small retailers would get hit hard by this large tax hike. Higher taxes translate into reduced sales, less foot traffic and fewer purchases of other goods, and lower earnings. That means less money available for investment, expansion, and hiring and paying employees. Already, many small firms and retailers are teetering on the financial edge. During this extraordinarily difficult economic period, Congress needs to focus on legislative efforts that create jobs, and revenue increasing opportunities for U.S. small businesses. Raising the cigarette tax runs counter to what needs to be done for small retailers.

Consider that the National Association of Convenience Stores has reported that cigarettes account for 38.6 percent of all in-store sales, with revenues totaling $41.1 billion, or $392,050 per store. Meanwhile, convenience stores employ 1.7 million people. Based on these numbers, the association calculates that cigarette sales are equivalent to more than 656,000 jobs in the industry alone. That business and many of those jobs would be lost if a tax increase were passed.

Indeed, the negatives would spread throughout the economy. For example, in February 2007, assessing a possible 50 cents increase in the federal excise tax, the Congressional Budget Office noted: "Because excise taxes reduce the tax base of income and payroll taxes, higher excise taxes would lead to reductions in income and payroll tax revenues."

Second, it should not be forgotten that this federal tax increase would come on top of very large cigarette tax hikes in the states in recent years. Consider, for example, that from 2000 to 2008, 44 states and District of Columbia raised cigarette taxes, and the average increase over this period was 287 percent. Unfortunately, more excise tax increases are being considered in the states this year. It's already bad enough for consumers and small businesses without the federal government piling on more.

Third, the combination of high federal, state and local cigarette taxes means that incentives are boosted for counterfeiting, and for moving supply and purchases underground. That means subsidizing all kinds of criminal activity, including smuggling and terrorism. A 2004 GAO report declared: "Many states ... have increased cigarette taxes, resulting in a large difference in the wholesale price and the price paid by consumers at the retail level and creating potential illicit profits of $7 to $13 per carton of cigarettes." It continued: "As cigarette taxes increase, so do the incentives for criminal organizations, including terrorist organizations, to smuggle cigarettes into and throughout the United States." Taxpayers naturally have to pick up the tab to fight such criminal undertakings, while expanded black market purchases mean additional lost business to small retailers.

Fourth, it is crucial to recognize that the cigarette tax is not a reliable revenue stream. That is, consumption, and therefore sales and tax revenues, are on the decline. Combine this fact with the negative revenue effects of smuggling, underground transactions, and declining business, incomes and jobs, and it is clear that tobacco taxes are not reliable revenue sources for government.

Time and again, revenue projections from tax increases fail to meet expectations. According to a study by Fiscal Planning Services, out of 57 tobacco excise tax increase from mid-2002 to mid-2007, 16 matched or exceeded the expected revenue estimates, while 39 fell short of projections. In New Jersey, for example, a 2006 excise tax hike was expected to increase revenue by $30 million, but the state actually lost revenue due to a larger than expected drop in sales.

Given that spending on health care programs like the State Children's Health Insurance Program (SCHIP) surge upward, there is no way that a higher cigarette tax would provide sufficient revenues over time. That means additional tax increases will be necessary.

In 2007, President Bush vetoed bills to expand SCHIP and impose higher taxes. Unfortunately, President-elect Obama supports the idea.

How about weighing in with your member of the House and your two U.S. senators on this bad idea? The U.S. Capital switchboard phone number is 202-224-3121. The operator can connect you with your House member, and/or senators. Why not give them a ring, and let your small business voice be heard?

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council