Jan. 6, 2010
A spokeswoman for Gov. Mark Parkinson announced last week that he will propose an increase in tobacco taxes to raise state revenue next year.
Beth Martino said Parkinson has yet to determine how much of an increase he’ll propose and whether the anticipated additional revenue will be dedicated to health care or to filling gaping budget shortfalls.
Derrick Sontag, director of Americans for Prosperity-Kansas, said he hopes the legislature will not turn to individual taxpayers for a financial fix.
“The problem is spending too much money in Topeka for a number of years now,” Sontag said. “At the rate of spending they’ve been going at, they knew they would eventually be in a mess like this. I’m disappointed (the governor is) turning to individuals when the problem all along has been the legislature spending too much money.”
A study commissioned by Sontag’s organization suggests that increasing cigarette taxes will likely lead to further budget shortfalls.
The state’s cigarette tax is 79 cents a pack, and Martino noted that it compares with a national average of $1.34 a pack. However, Patrick Fleenor, the chief economist for Fiscal Economics in Virginia, said his research revealed that when a state increases taxes on a certain item, sales drop more than expected.
He uses Kansas’ most recent cigarette tax hike in 2002 as an example.
“In 2002, the state raised the (cigarette) tax,” he explained. “They predicted sales would drop initially 10 percent.”
State officials projected that cigarette sales would recover to 95 percent the following year.
“That didn’t happen. They dropped around 20 percent the first year and another 5 percent the year after that,” Fleenor said.
Sontag said because the state bases its budget on projections, increased taxes like the one in 2002 often lead to further budget shortfalls when projections don’t meet the expectations.
“The problem we had in raising that tax in 2002 is, we created a shortfall within our own tax increase,” Sontag said. “Just one tax increase created a budget shortfall.”
Sontag said his organization commissioned Fleenor’s cigarette tax study to show legislators that the more something is taxed, the less they’re going to receive in state revenues.
In the study, Fleenor emphasized how increasing cigarette taxes historically affects the number of packs of smokes sold.
“Over the years, Kansans have become masters of avoiding high cigarette levies,” Fleenor wrote in his study.
Kansas became the 11th state to institute a cigarette excise tax in 1927. Prior to that, smoking was prohibited in the Sunflower State. When the legislature legalized tobacco, it enacted a 2-cent-per-pack tax.
“Consumers living in border areas could save as much as 20 cents per carton (about $2.50 in today’s dollars) by making their purchases in the surrounding states, none of which levied a cigarette tax at the time,” Fleenor wrote in a study released last spring.
Kansas’ tobacco tax created a well-paying market for smugglers historically. According to Fleenor’s research, every truckload of bootleg smokes from neighboring states earned about $2,000 (or $25,000 in today’s dollars) during the Great Depression. And in today’s economy, Kansas tobacco retailers face additional competition from Indian reservations, military bases and Internet outlets. Not only do Kansas retailers feel the cigarette sales pinch, they also lose sales on complementary products like coffee and candy.
Kansas is particularly susceptible to border shopping. More than 45 percent of the state’s population lives in counties bordering neighboring states.
“That’s one of the dangers we have in turning to cigarette, gas or liquor taxes when you have so many of our residents living next to Missouri,” Sontag said. “We’re at a disadvantage.”
It isn’t just the shoppers who move out, but occasionally the retailers themselves.
Fleenor used one QuikTrip store in Kansas City as an example.
After Kansas’ 2002 cigarette tax hike, the store moved 100 feet from its Kansas location into Missouri to take advantage of that state’s favorable tax climate.
Fleenor said his research reveals that the increased tax rate hasn’t resulted in fewer smokers. It’s resulted in more tax evaders.
“During periods of moderate taxation, legal sales of taxed cigarettes remain high,” Fleenor explained. “Sharp increases in the levy, on the other hand, have cut sharply into tax-paid sales and hurt revenue, as smokers secure their nicotine fix outside the borders.”
By 2003, the state tax rate was 79 cents per pack. Despite evidence that increases in cigarette taxes hurt businesses and state revenues, Fleenor said the temptation to levy taxes on a minority of the population to fund popular public programs has proven too strong for some politicians.
Former Gov. Kathleen Sebelius proposed a 50-cent tax increase to fund a health insurance program in 2004 and in 2007. Both plans were scuttled; however, Parkinson is set to put a cigarette tax back on the table in 2010.
Although Fleenor isn’t a smoker, his research has made him sympathetic to smokers who he says bear an undue tax burden.
“What an ideal policy would look like is one where people bore the full cost of their actions,” he said.
Using a complex economic model, he believes that would translate into a 35 cent per pack tax. He said federal and state taxes are well over that.
“At all levels, cigarettes are overtaxed,” Fleenor said. “Under current law, smokers bear an undue share of the tax burden.”
Sontag said rather than levying new taxes or raising existing ones, the legislature and governor should look to cut spending. Over the last five years, state spending has increased by 40 percent.
“With the economic downturn, perhaps the governor is trying to use revenue numbers as an excuse, but we simply cannot maintain a rate of spending 40 percent more over the last five years,” Sontag said.