Legislative Testimony: LB 1013, Cigarette Tax Increase

Chairman Gloor and Members of the Revenue Committee, my name is Jim Vokal and I am the CEO of the Platte Institute for Economic Research. Thank you for this opportunity to speak in opposition to LB 1013.

First, I want to applaud the members of the committee for trying to find a way to reduce the state property tax burden and costs to our Medicaid program. We have testified in support of lowering the property tax burden, yet today, I must speak against raising the cigarette tax. I know the committee members that support this tax increase are well intended, but this is not the way to properly address property tax reform or fund state government.

From a funding perspective, cigarette taxes are an extremely unstable revenue source. Over the last ten years, cigarette sales in Nebraska have generally declined an average of 2 percent per year.[1] And higher taxes bring an expectation of even lower sales. During the same time period, the state’s government expenditures have grown an average of 3.7 percent.[2] If Nebraska relies on this tax to fund property tax relief or any other reoccurring government expenditure, it will create long-term funding shortfalls that will have to be paid for with other budget revenues. The National Conference of State Legislatures supports this, stating “Cigarette taxes are not a stable source of revenue.”[3]

From a policy standpoint, this regressive tax would affect lower-income adults the most. According to the Centers for Disease Control and Prevention, 34.8 percent of adults in Nebraska who earn less than $15,000 per year are smokers.[4] Raising this tax will unfairly burden these low-income earners.

There is a general consensus among policymakers that increasing ‘sin’ taxes, such as the cigarette tax, will reduce consumption. However, 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.

A 2014 study by the National Bureau of Economic Research found that current smokers have demonstrated a strong preference for the habit, that is largely undeterred by tax rates. The study also found that if the tax was increased by 100 percent, it would decrease adult smoking by only five percent.[5]

Under current law, Nebraska is ranked 40th in the nation, with Missouri and Wyoming the only neighboring states with lower rates. If this bill is enacted, the 234 percent increase will give Nebraska the 12th highest rate in the country and the highest amongst its neighbors.

LB 1013 could also unintentionally trigger an illegal market for tobacco. 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. According to these economists, “Nebraska’s 2013 smuggling rate was a puny 2.8 percent of total cigarette consumption in the state. But if the proposed bill, LB 1013, is adopted that rate will rocket to 32.3 percent of the total market, putting Nebraska 5th overall behind Rhode Island, a perennial cigarette smuggling state.”

In addition to smuggling concerns, the increased tax rate would also mean that Nebraska would see a decline in the sale of legally taxed cigarettes, but not on the assumption that fewer people are smoking. The Journal of Health Economics found that up to 85 percent of the change in legal sales after a tax increase is due to tax avoidance and evasion, not by quitting smoking. [6] Ultimately, variations in state cigarette taxes often result in smuggling, legal border crossings to low tax jurisdictions, and internet purchasing.

Again, while I am sympathetic to the committee’s intent with this bill, after a review of the evidence and sound tax policy, an increase in the cigarette tax would do more harm than good in Nebraska.

Thank you for the opportunity to testify before you today. I am happy to answer any questions.