Tobacco products are already very heavily taxed. Between July 1999 and July 2009, federal and state governments increased cigarette excise taxes 101 times, resulting in an increase of 142 percent in the average price of a pack of cigarettes nationally over that time period.
1 Philip Morris USA opposes tobacco product excise tax increases that:
Are unfair to adult tobacco consumers. Revenues from tobacco product excise taxes are often used to fund general government spending that benefits many, while the economic burden of tobacco taxation is placed solely on tobacco consumers. In addition, because tobacco excise taxes are based on the product and not on income level, tobacco excise taxes are highly regressive, adversely affecting low-income tobacco consumers more than high-income tobacco consumers. The Congressional Research Service identified cigarette excise taxes as “probably the most regressive of the federal taxes.”
2Create additional incentives for contraband and counterfeit tobacco product trafficking. Increases in tobacco product excise taxes create significant financial incentives for criminals to engage in contraband trafficking in tobacco products. As one agent in the federal Alcohol, Tobacco, Firearms and Explosives (ATF) agency has stated, “There is no doubt that there’s a direct relationship between the increase in a state’s tax and an increase in illegal trafficking.”
3 Cigarette excise tax increases may also accelerate the growth of illegally imported cigarettes as well as imports of counterfeit cigarettes manufactured in countries such as China. The ATF and Immigration and Customs Enforcement have described contraband and counterfeit cigarette imports into the United States as a “significant problem.”
4 U.S. Customs and Border Protection’s 2008 mid-year seizure statistics list cigarettes in the top ten commodities seized.
5Harm states by increasing incentives for adult tobacco consumers to buy tobacco products through lower-tax or untaxed revenues. Tobacco tax increases can lead to unintended consequences—including contributing to decreases in state revenues. Because tobacco excise tax rates differ significantly between the states, adult tobacco consumers may travel to adjoining states with lower tax rates to purchase tobacco products. Alternatively, they may purchase cigarettes over the Internet or on Native American territories. These alternative purchasing patterns deprive the home state of expected revenue and harm local retailers. According to a tax study prepared for the New York Association of Convenience Stores, as a result of the high tobacco tax burden in New York, illegal sales of cigarettes flourish and state and city taxes are paid on less than half of cigarettes purchased by New Yorkers. Following a $1 increase in the state cigarette excise tax in 2007, Texas witnessed Internet cigarette purchases by Texas residents increase from 2 percent of total national on-line sales to 17 percent.
6 For the fiscal year 2005-06, the California Board of Equalization estimated the state’s cigarette excise tax revenue evasion at $182 million and the state’s revenue losses from sales of tobacco products at $94 million.
7Are costly to legitimate businesses, including retailers and wholesalers. Tobacco product sales are an important revenue source for many retailers and wholesalers. According to the National Association of Convenience Stores, cigarette and other tobacco product sales account for over 36 percent of all in-store sales at convenience stores nationwide.
8 When consumers of tobacco products react to a tax increase by shifting their purchases across state lines or to other sources, such as on Native American territories or over the Internet—where taxes are often not collected—legitimate retailers and wholesalers lose sales and revenues. The impact of this purchasing shift on retailers becomes even more pronounced when tobacco purchases are combined with other products, such as gasoline and groceries.
Do little to solve systemic state budget problems and can lead to less stability in the states’ finances. According to the National Conference of State Legislatures, a stable revenue source is one that is “broad-based, equitable and not narrowly targeted at one specific type of economic activity (such as cigarette sales). Tobacco product excise taxes do not fit these criteria.”
9 Cigarette excise tax increases frequently yield lower-than expected revenues. Of the 57 state cigarette excise tax increases that were implemented between FY 2003 and FY 2007, only 16 met or exceeded projected revenues.
10 Total state tax-paid cigarette sales declined by an average of 2.2 percent per year since 1990, and more than 5 percent in 2008, resulting in a loss of $23.7 billion in federal tax, state tax, and tobacco settlement revenue.
11 If a state relies on a cigarette excise tax to fund important government programs, it will create long-term funding revenue shortfalls that will have to be paid for with other budget revenues or through additional tax increases.
Many states tax smokeless tobacco products using the “ad valorem” method of taxation—a percentage of the wholesale price. PM USA supports legislation to convert the method of taxation on moist smokeless tobacco (MST) to a method that is more appropriate to these products. In particular, we believe MST products should be taxed by weight.
PM USA supports weight-based taxation of MST because it will:
- Establish tax equity for MST products of equal tobacco weight;
- Tax MST in the same manner as the federal tax on MST and consistent with how state excise taxes are collected on other products;
- Create a more stable and predictable MST tax revenue for states;
- Reduce the complex administrative burden on states, wholesalers, and retailers; and
- Remove the tax subsidy for lower priced products.
We also believe that “little cigars”—which share many similarities with cigarettes in their appearance, packaging and marketing—should be taxed at the same rate as cigarettes.
