Debunking a Bogus Study on the Ohio Cigarette Tax


Posted by Joshua Culling on Wednesday, September 22nd, 2010, 11:15 AM PERMALINK

Last week, the American Lung Association published a study calling for a doubling of the Ohio cigarette tax from $1.25 to $2.50 per pack. The paper is explicitly incorrect on a number of points, among them the authors' contention that in states that have raised the cigarette tax over time, "each increase leads to a significant and sustained increase in tax revenues." New Jersey would beg to differ after its 2007 tax increase resulted in a net revenue loss of $22 million. Washington, D.C. reported a $7.6 million revenue decline just this year after raising its tax 50 cents per pack in 2009.

More importantly, the study ignores the impact of a tax increase on Ohio's small business community. Ohio, with its current $1.25 per pack tax rate, is already at a comparative disadvantage with Indiana (99.5 cents), Kentucky (60 cents), and West Virginia (55 cents). The American Lung Association proposal would round out that list, with retailers in Pennsylvania ($1.60) and Michigan ($2.00) gaining a price advantage over their counterparts in the Buckeye State.

In a letter to the Ohio Legislature, ATR President Grover Norquist underscored the potential impact on jobs in the face of Ohio's double-digit unemployment:

Anti-smoking advocates often push their view that higher cigarette taxes mean less people smoke. While that may be true, what is more certain is that less people buy cigarettes in jurisdictions where the prices are higher. The reality is that states compete – for jobs, for people, and for commerce – and with a cigarette tax rate higher than all bordering states, many Ohio smokers will simply make their purchases elsewhere.

Thus, in a state with double-digit unemployment, a cigarette tax increase will only further push small businesses across state lines – along with the jobs they provide to Ohioans. Do not be surprised to see convenience store owners and state government officials from Michigan, Indiana, Kentucky, West Virginia and Pennsylvania show up in Columbus to lobby for higher taxes in Ohio. They will gladly accept the business, the jobs, and the tax revenue.

Gov. Strickland raised taxes by $844 million less than a year ago. Ohio simply cannot afford to continue down the same path.

To read ATR's letter to the Ohio Legislature, see below. For a PDF copy, click here.

September 22, 2010

Dear Legislator:

With a projected $8 billion overspending problem, a number of ideas are being considered to return Ohio’s budget to solvency. Unfortunately, many of them involve increasing taxes in the midst of high unemployment and sluggish economic output. This would be unwise.

Last week, the American Lung Association published a flawed study that called for a doubling of Ohio’s cigarette tax. Predictably talking out of both sides of its mouth, the organization dually claimed that such a tax increase would raise boatloads of revenue for state government while also dramatically reducing smoking in Ohio. Not only are these individual aims completely at odds with one another, but evidence from other states suggests that neither is likely to be true.

The first sentence of the American Lung Association study sets the tone for the entire paper: utterly false and easily debunked. The authors write that “state cigarette and other tobacco tax revenues are among the most predictable, steady, and reliable revenues that states receive.” In reality, the fact that cigarette smoking is already on the decline is only exacerbated when government artificially drives up the cost of the product. This means that should Ohio double its cigarette tax rate to $2.50 per pack, tax-paid sales will decline as smokers look elsewhere to purchase cigarettes. It is not difficult to envision a scenario in which a low-income Cincinnati smoker (those who smoke are disproportionately poor) crosses into Kentucky to save nearly $20 on a carton of cigarettes.

This means an unstable revenue stream immediately following a tax increase. Data from other states bear this out: Between 2003 and 2007, state excise taxes on cigarettes were increased 57 times. In only 16 of these cases did the tax hikes raise the revenue initially projected, meaning ongoing spending priorities were increasingly underfunded over time.

The American Lung Association claims that “in states where taxes have been increased regularly over time, each increase leads to a significant and sustained increase in tax revenues.” This is patently false. In 2007, New Jersey raised its cigarette tax rate 17.5 cents per pack and saw a net loss of $22 million. In 2009, Washington, D.C. raised its tax 50 cents per pack, then announced this past February a $7.6 million revenue decline.

Anti-smoking advocates often push their view that higher cigarette taxes mean less people smoke. While that may be true, what is more certain is that less people buy cigarettes in jurisdictions where the prices are higher. The reality is that states compete – for jobs, for people, and for commerce – and with a cigarette tax rate higher than all bordering states, many Ohio smokers will simply make their purchases elsewhere.

Thus, in a state with double-digit unemployment, a cigarette tax increase will only further push small businesses across state lines – along with the jobs they provide to Ohioans. Do not be surprised to see convenience store owners and state government officials from Michigan, Indiana, Kentucky, West Virginia and Pennsylvania show up in Columbus to lobby for higher taxes in Ohio. They will gladly accept the business, the jobs, and the tax revenue.

In the interests of your constituents and Ohio’s economy, I urge you to oppose a tax increase of any kind – on cigarettes or otherwise – to rectify what is in reality an overspending problem.

Onward,

Grover Norquist

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