Opinion Editorial | |
| Wednesday, May 20, 1998 | |
GAO Reports Economic Effects of Tobacco Tax |
On May 1, the Senate Commerce Committee reported S. 1415, the tobacco
bill, which would increase the cigarette tax by $1.10 per pack. Not to
be outdone, on May 14 the Senate Finance Committee voted to go one better
and raise the tax by $1.50 per pack. Meanwhile, Wall Street analysts believe
that when all of the provisions of the tobacco bill are taken into account
the actual price increase will be closer to $3 per pack. In its haste to enact one of the largest tax increases in American history,
Congress has done precious little analysis of what impact this legislation
will have on the economy. Fortunately, a new report from the U.S. General
Accounting Office (GAO) fills some of the gap (available at www.gao.gov).
According to the GAO, a price increase even in the $1.10 range will lead
to a significant increase in cigarette smuggling, reduce state tax revenues
sharply, and have a major impact on employment in some states. The GAO makes clear that cigarette smuggling is already a very serious
problem in the United States. The report presents estimates of the revenue
loss from smuggling in all 50 states. Among those most heavily impacted
are Michigan, which loses $105 million annually; New York, which loses $93
million; and California, which loses $80 million. In the aggregate, the
states are estimated to lose at least $674 million per year due to interstate
cigarette smuggling from low-tax states to high-tax states. Although the GAO did not attempt to estimate the increase in smuggling
that might result from passage of national tobacco legislation, it did note
that smuggling is already a growing problem along the U.S.-Mexico border.
There are numerous duty-free shops along the border that specially cater
to casual and organized smuggling. A carton of cigarettes purchased at
one of these shops sells for almost 50 percent less, $10.50 versus $20,
which is more than enough incentive for many people to smuggle. The California
Board of Equalization, which collects state cigarette taxes, estimates that
the state loses between $20 million and $50 million to cigarette smuggling
from Mexico. The GAO also looked at what the impact on state revenues will be from
the decline in smoking that will result from the tobacco legislation. It
estimates that a $1.50 per pack tax increase will reduce cigarette consumption
by between 19 percent and 33 percent. Of course, if the private analysts
are right and the actual price increase is higher still, the decline in
consumption could be 40 percent or more. Declining consumption means less revenue collected by states for their
cigarette taxes. The biggest losers, obviously, are those with the highest
tax rates. The GAO estimates that Michigan will lose between $50 million
and $220 million per year. California, New York and Texas may also lose
more than $200 million per year each. Combined, the states are estimated
to lose $673 million to almost $3 billion in revenue if the tobacco legislation
is enacted. Finally, the GAO looked at the impact of higher tobacco taxes on employment.
It found that the net impact of the legislation will be to increase jobs,
on the assumption that all the money individuals save from reduced smoking
is spent on other goods or services. However, because the tobacco industry
is concentrated in the Southeastern part of the U.S., that region would
suffer a net loss of 37,000 jobs. In fact, the total job loss will be much higher unless Congress returns
every penny of the higher cigarette revenues to the people in the form of
tax cuts. Otherwise, there will be a net reduction in purchasing power
and a slowing of economic growth, as a result of the higher net tax burden. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
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