Nebraska Cigarette Tax Increase Would Raise Prices, Reduce Revenue Reliability, and Increase Smuggling
Over the past 30 years, Nebraska cigarette consumption has declined from 101 to 27 packs per person per year. This is remarkably good news for public health, but it is bad news for the reliability of cigarette tax revenue. Nebraska raised three times as much cigarette tax revenue in 1986, at 27 cents per pack, as it did in 2025, at 64 cents per pack.
When lawmakers raised the rate from 34 to 64 cents per pack in 2002, an 88 percent increase, revenues rose about 54 percent over the next few years before resuming their persistent decline. In 2004, the tax raised about $114 million in real terms. In 2025, it raised $35 million. Inflation eroding the value of the tax rate is part of the story, but so is a 55 percent reduction in per capita cigarette consumption. Only 12 percent of Nebraska adults smoke, and that number is declining, particularly with younger generations less likely to take up smoking.
LB 1124 would raise the cigarette tax from $0.64 to $1.64 per pack, by far the largest increase in the history of Nebraska’s cigarette tax. This would temporarily increase revenues, but the consistent experience across many decades in every state is that cigarette tax revenue is unstable and that higher cigarette taxes are an unreliable way to fund additional services.
Demand for cigarettes is relatively price inelastic. Existing smokers are likely to continue smoking even if the cost of cigarettes increases. Smokers are also disproportionately lower-income, meaning that the higher tax will overwhelmingly fall on lower-income Nebraskans.
The higher tax would also introduce a new form of revenue volatility: cigarette smuggling. Nationwide, cigarette smuggling is a major problem that takes multiple forms: “casual smuggling,” when smokers cross jurisdictional lines to purchase lower-tax cigarettes; and organized smuggling, which can involve the illegal sale of cigarettes sourced from lower-tax states, but also involves the illicit sale of counterfeit cigarettes, many smuggled from China and containing toxic heavy metals and other contaminants. An estimated 1.62 billion packs are smuggled in the U.S. every year, and 1.17 billion of them are smuggled from abroad, most of which are counterfeits.
Nebraska’s low cigarette taxes have made cigarette smuggling almost a non-issue, with a smuggling rate of only 3.6 percent. That would change if the cigarette tax were raised to $1.64.
In Kansas, with a $1.29 per pack rate, an estimated 16.1 percent of all cigarettes purchased in the state are smuggled. In Colorado, at $1.94 per pack, smuggling accounts for 19.1 percent of cigarette purchases. Nebraska is not far from Missouri, with a tax of $0.17 per pack, or Wyoming, at $0.60 per pack, which would become sources of interstate smuggling into Nebraska. If Nebraska’s smuggling rate rose in line with those of Kansas and Colorado, an estimated $17.5 million of the revenue the state would ordinarily expect to gain from the $1-a-pack tax increase would be lost to smuggling alone.
When cigarettes cross state lines in response to a higher tax rate, Nebraska loses out on a substantial share of its expected revenue increase due to the illegal smuggling of cigarettes legally produced for sale in another U.S. market. When foreign counterfeits flood the market, they also dramatically increase cigarette toxicity for existing Nebraska smokers.
Raising the cigarette tax to $1.64 is counterproductive. It would increase revenues in the short run, but with substantial leakage due to dangerous cigarette smuggling. It will increase tax burdens on lower-income Nebraskans. And whatever additional revenue it generates will erode quickly, for the good reason that fewer and fewer Nebraskans smoke cigarettes.