In a proposal to the Kentucky legislature, Democrat Governor Steve Beshear presented a "tax reform" package that included more than $124 million in higher taxes on both traditional tobacco cigarettes and e-cigarettes. The overall package is a $210 million tax hike, which we have written about here.
Not only will his plan chase business out of the state, it will cost small business struggling to make ends meet tens of thousands of dollars in lost revenue. As described, Beshear's proposal is a violation of the Taxpayer Protection Pledge and should be rejected unless substantive changes are made. Americans for Tax Reform opposes the proposal, and ATR president Grover Norquist sent a letter to the legislature, which reads as follows:
I write today in opposition to all efforts to increase cigarette and e-cigarette taxes in Kentucky. Governor Steve Beshear’s “Kentucky Competes” tax reform plan includes both. His proposal increases the per pack tax on cigarettes from 60 cents to $1 dollar and creates a 20 percent excise tax on all e-cigarettes. Not only are these proposals punitive for low-income individuals, they make little sense.
Increasing taxes on tobacco and e-cigarettes will hurt countless Kentucky small businesses, especially convenience stores that rely on these products for one third of total store sales. Raising taxes on consumers will significantly decrease in-state sales, cutting into the state’s bottom line.
A 40-cent increase of the current cigarette tax will send consumers to surrounding states with lower rates and increase smuggling across state lines. Just ask Illinois lawmakers. In May of 2012 when Illinois raised the cigarette tax by $1-per-pack, the tax delivered $138 million less than expected. Local small businesses lost tens of thousands of dollars as a direct result as consumers purchasing tobacco across state lines in Indiana and Missouri. This is precisely why tobacco taxes are an extremely volatile revenue source that prompt future tax hikes. Revenue for Kentucky coffers would likely fall short of the annual $125 million projection cited by the governor. Furthermore, the last thing that those who seek to combat smoking should want is the commonwealth increasing its reliance on tobacco tax revenue.
The proposal to create a 20 percent excise tax on e-cigarettes is particularly troubling. A number of studies have shown that electronic cigarettes stand to improve health and prevent disease. By choosing to “vape” e-cigs instead of smoking traditional tobacco, consumers get their nicotine fix without the combustion and smoke, which are responsible for many of the negative health effects of tobacco cigarettes.
For decades, lawmakers have tried to mitigate smoking and the harm it causes through punitive taxation and heavy regulation. However, with e-cigarettes, the free market has provided a solution to a problem that social engineers have not been able to address through stiff government regulations. The imposition of new taxes on these products perpetuates an issue lawmakers have spent so much time trying to eliminate, as e-cigarettes cut down on smoking and people’s dependence on tobacco cigarettes.
The cigarette and e-cigarette tax hikes are shameless cash grabs that make little sense from a revenue or public health perspective. Legislators should remove these provisions from the plan before considering the rest of the package during this year’s legislative session. While Governor Beshear’s Kentucky Competes proposal is a good start for a discussion on the need for tax reform in the state, it represents a $210 million annual net tax hike on Kentucky taxpayers, which is the last thing Kentucky residents need after seeing over 20 new and higher federal taxes imposed from Washington in just the past few years.
Please look to ATR as a resource and if you have any questions about ATR’s position on any number of tax issues, please contact state affairs manager Paul Blair at 202-785-0266 or by email at [email protected].