Legislative Testimony for LB459, Change provisions relating to the cigarette tax and the Tobacco Products Tax Act and distribute tax proceeds as prescribed

It is a well-established and empirically supported statement that cigarette taxes are not a stable source of revenue. In the last decade, 85% of cigarette excise tax increases missed their revenue projections. There are 23 separate instances where there is state data that show how far states missed projections, and of those, only 4 experienced more revenue, while the remaining experienced less. Another survey found that tobacco tax collections failed to meet initial revenue targets in 72 out of 101 recent tax increases.

From a policy standpoint, this regressive tax would affect lower-income adults and those with disabilities the most. According to the Centers for Disease Control and Prevention, current cigarette smoking is significantly higher among adults with a disability (27.8%) as compared to adults without a disability (13.4%)[i] and disproportionately affects adults with an annual household income less than $35,000 (21.4%).[ii]

Under current law, Nebraska is ranked 41st in the nation, with Missouri and Wyoming the only neighboring states with lower rates. If this bill is enacted, the 234% increase will give Nebraska the 15th highest rate in the country and the highest amongst its neighbors.

Evaluating the impact of LB459 on a national scene is important because research has found that higher tobacco taxes reduce usage by an insignificant amount and are more likely to increase smuggling, creating an illegal tobacco market, without necessarily improving health outcomes.

Economists at the Mackinac Center for Public Policy in Michigan have created a statistical model to estimate the degree to which cigarette smuggling occurs in all fifty states. Over the years they have found that as a general rule, smuggling rates rise in a state after they adopt a cigarette tax increase. They also see smuggling rates decrease when a neighboring state enacts a higher cigarette tax rate.[iii]

Right now, Nebraska is considered a net exporter of cigarettes. For every 100 cigarettes consumed in Nebraska, less than 1% was a function of tax evasion and avoidance on net. If LB459 were to be enacted, this would be quite the opposite. Nebraska would see a decline in the sale of legally taxed tobacco products, but not on the assumption that fewer people are smoking.

The Journal of Health Economics found that up to 85% of the change in legal sales after a tax increase is due to tax avoidance and evasion, not by quitting smoking. Evidence for this was demonstrated after the 2002 cigarette tax increase when Nebraska lost $121 million in cigarette excise tax revenue to neighboring states, and state budget revenue fell 20% short of projections.

Another reason for our opposition to LB459 is the inclusion of electronic nicotine delivery systems, or vapor products, into the tobacco products definition. A December 2019 study by the National Bureau of Economic Research found that taxing vapor products the same as traditional cigarettes would result in an 8.1% increase in smoking and would deter many smokers from transitioning away from cigarettes. For many, vapor products are a smoking cessation product. To group the entire product under the same definition is counterintuitive if the goal is to encourage people to quit smoking.

The taxation for vapor products must also be looked at on a nationwide scene for possible policy and economic impacts. The proposal before you would levy a 20% excise tax on vapor products, which would be the highest of our neighboring states. Only Kansas and Wyoming currently have a vapor tax; Wyoming is at 15% and Kansas has the lowest rate nationwide at $0.05/ml.

Vapor products are already subject to the sales tax in Nebraska. If this high of an excise tax is placed on vapor products, the state of Nebraska and local governments will more than likely see a reduction in their sales tax revenues due to cross-border sales.

After a review of the evidence and sound tax policy, we believe that an increase in the cigarette tax would do more harm than good in Nebraska.

[i] https://www.cdc.gov/ncbddd/disabilityandhealth/smoking-in-adults.html

[ii] https://www.cdc.gov/tobacco/data_statistics/fact_sheets/adult_data/cig_smoking/index.htm

[iii] For more information, see Table 1 comparing 2018 and 2006 smuggling rates and tax changes, https://taxfoundation.org/cigarette-taxes-cigarette-smuggling-2020/.