Impact of the 2003 Cigarette Excise Tax Increase on Consumption and Revenue in the State of Wyoming

Transcription

1 Impact of the 2003 Cigarette Excise Tax Increase on Consumption and Revenue in the State of Wyoming

2 Impact of the 2003 Cigarette Excise Tax Increase on Consumption and Revenue in the State of Wyoming Report to the Wyoming Department of Health, Substance Abuse Division by Marc J. Homer, M.P.A., Zafar Dad Khan, Graduate Research Assistant, and Thomas A. Furgeson, M.A., Research Assistant Wyoming Survey & Analysis Center University of Wyoming WYSAC Technical Report No. HEG-403 February 2005 Wyoming Survey & Analysis Center 710 Garfield Suite 320 Laramie, WY (307)

3 WYSAC, University of Wyoming Impact of Cigarette Tax Increase TABLE OF CONTENTS PAGE List of Figures and Tables 3 Section 1: Introduction 4 Section 2: National Trend Analysis 5 Section 3: Wyoming Trend Analysis 7 Section 4: Wyoming and Neighboring States 11 Section 5: Economic Cost of Smoking for Wyoming 13 Section 6: Environmental Threats to Revenue Maximization 14 Section 7: Conclusion 14 References 15 Appendix A, Results from Other States 17

4 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Figures and Tables Figure 1 State-Level Cigarette Excise Tax Rates, February 1, 2004 Figure 2 U.S. Consumption of Cigarettes with Projection to 2005 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Table 1 Table 2 Monthly Sales for Wyoming (in packs) Monthly Cigarette Excise Tax Revenue for Wyoming Comparisons of Pre and Post Tobacco Tax Average Sales Comparisons of Pre and Post Tobacco Tax Revenue Other Tobacco Quarterly Sales/Consumption for Wyoming STATE CIGARETTE TAX RATES & RANK, DATE OF LAST INCREASE, ANNUAL PACK SALES & REVENUES, AND RELATED DATA: Wyoming and neighboring states. STATE CIGARETTE TAXES & PROJECTED EFFECT OF INCREASING THEM: Wyoming and neighboring states Appendix A Figure A1 Figure A2 Figure A3 Figure A4 Figure A5 Figure A6 Monthly Cigarette Sales in New York (in millions of packs) Monthly Cigarette Excise Tax Revenue for New York (millions of dollars) Monthly Sales for California (in packs) Monthly Cigarette Excise Tax Revenue for California Monthly Sales for Utah (in packs) Monthly Cigarette Excise Tax Revenue for Utah (millions of dollars)

5 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Introduction This analysis examines: The impact of excise tax increases on sales and revenue in Wyoming Deterrence impact of Wyoming s taxation policy. The aim of this analysis is to provide a trend and policy context for reviewing what has happened in Wyoming in the last few years with regard to tobacco control, particularly in terms of tobacco taxation, and the potential course of future policies. The analysis will compare Wyoming s situation with nationwide trends. A review of the literature examines economic policy tools designed to reduce smoking prevalence and further explains the rationale for manipulating tax rates as an effective policy intervention. The price of cigarettes in Wyoming began to increase steadily in 1997, when wholesale cigarette prices rose by more than 12 percent, partly due to settlements between the tobacco industry and a few states. In November 1998, the day that the Master Settlement Agreement was announced, wholesale prices increased an additional 45 cents per pack. Wholesale prices increased again in 1999 by 18 cents per pack and more when the sales tax exemption was removed from cigarettes (WYSAC Baseline & Trends 2003). Cigarette prices rose again in 2003 with the implementation of an excise tax increase from 12 cents to 60 cents per pack. This measure elevated Wyoming s tax rate from 5 th lowest in the nation to 28 th in the nation (Campaign for Tobacco-Free Kids, 2004). Prior to the increase, 62.0 percent of Wyoming adult respondents in the 2002 Adult Tobacco Survey favored an increase of the state cigarette tax as a deterrent to smoking while 34.0 percent favored an increase of more than $1 per pack (WYSAC, 2003). An analysis by Zimring and Nelson (1995) has shown that government policy towards cigarette taxation may be intended to satisfy three objectives: revenue, efficiency, and deterrence. Tobacco is often susceptible to high tax rates and is a popular source of government revenue. Tobacco tax is also a well documented and effective policy measure with which to discourage smoking (Warner, 1987; Chaloupka and Warner, 1999). With efficiency in taxation a distinct goal of government, this could be achieved by setting the tax at a level which reflects the social cost of cigarette consumption (Grossman, 1989). Raising cigarette taxes can significantly influence progress toward achieving the Wyoming Tobacco Blueprint/CDC goals of preventing the initiation of tobacco use among young people, promoting quitting among young people and adults, and reducing the frequency of regular tobacco use. Economic studies show that a 10 percent increase in the price of cigarettes will reduce overall smoking among adults by about 4 percent. A consensus view is that for every 10 percent rise in price, there will be a 7 percent decrease among young people smoking (CDC, 1999). The most important finding of economic analyses of tobacco use to date is arguably the repeated demonstration that youth smokers are responsive to price changes (Chaloupka and Warner, 1999).

6 WYSAC, University of Wyoming Impact of Cigarette Tax Increase While cigarette taxes are a deterrent to smoking, they have also proved to be a reliable means for states to increase revenue. More states raised their cigarette tax in 2002 than in the past 5 years combined (Farrelly et al. 2003). Opponents often argue that cigarette tax increases promote tax evasion and may decrease cigarette excise tax revenue. But as a matter of fact, every state that implemented a significant tax increase between 1990 and 2001 also realized a significant increase in total annual cigarette excise tax revenue, while states that did not increase their cigarette tax rates tend to lose cigarette tax revenue over time due to inflation and smoking declines (Farrelly et al. 2003). Supporting this positive effect, a study by Fleenor (2003) suggests that the recent tax increases in many states may have largely been in response to state budget shortfalls. This report shows that the 2003 tax increase has both increased tax revenue and reduced cigarette consumption in Wyoming. Based on an analysis of various state and national trends and supported by the literature we predict that the increased cigarette excise tax will continue to provide state tax revenue at a higher level than before the increase despite related consumption declines and the possibility of related tax evasion, cross border/internet sales, and smuggling. National Trend Analysis In recent years, average state cigarette excise taxes have doubled from 31 cents (in 2002 dollars) (Farrely et al., 2003) in 1990 to 84.7 cents in Current state-level cigarette excise taxes range from 3 cents per pack in Kentucky to $2.46 per pack in Rhode Island. The federal cigarette tax is 39 cents per pack. From the beginning of 1998 through 2002, the major cigarette companies increased the prices they charge by more than $1.25 per pack but also instituted aggressive retail-level discounting for competitiveness (Campaign for Tobacco-Free Kids, 2004). Nationwide, recent tax hikes have led to greater disparity in the level of taxes between states. The average cigarette excise tax in the major tobacco producing states is 15.3 cents per pack compared with the national average of 84.7 cents per pack (Campaign for Tobacco-Free Kids, 2004). Figure 1 shows that the states surrounding Wyoming are in the same general range however, following recent tax increases in Colorado (64 cent increase, 11/04) and Montana (150 cent increase, 11/04). Idaho s tax will revert to 28 cents per pack in July 2005, reestablishing an imbalance between Wyoming and a neighbor state that could influence cross-border sales in the Western part of Wyoming.

7 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Figure 1: State-Level Cigarette Excise Tax Rates, Wyoming VT NH 151 MA 246 RI 151 CT 240 NJ 55 DE 100 MD 100 DC Legend State Excise Taxes 3 to 24 cents 25 to 49 cents 50 to 100 cents 101 to 250 cents See footnotes 1 Idaho scheduled to revert to 28 cents on 7/1/ cent increase in Virginia will go into effect 7/1/05. 3 Hawaii scheduled to revert to $1.00 on 7/1/06. Sources: Campaign for Tobacco Free Kids (2004); RTI data; Farrely et al., Figure 2 shows the trend of tobacco consumption for the U.S. (with a few years of projection) (Farrely et al., 2003). Tobacco consumption has clearly gone down throughout the nation and is projected to decrease in the future. Figure 2: U.S. Consumption of Cigarettes with Projection to 2005 Secondary Source: Farrely et al., 2003.

8 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Wyoming Trend Analysis Analysis in various states (see Appendix A) reveal a typical pattern: when excise taxes increase, sales initially drop sharply, then slowly rebound to an overall sales decrease and accompanying revenue increase from cigarette excise tax collections (Farrely et al., 2003). Below, we analyze the trend of total annual cigarette sales as well as excise tax revenue for Wyoming during the last few years. The decline in cigarette sales in response to a tax increase has a short-term and a long-term component. Sales usually increase just prior to a tax increase. This increase is probably driven by consumers who are hoarding cigarettes to delay the impact of the tax. Similarly, sales decline sharply following an increase in cigarette excise taxes. The steep decline in sales following the tax increase is probably driven by consumers quitting or cutting back on smoking, and consumers who either use cigarettes that they have bought prior to the tax increase or cigarettes that they have bought from alternative low price sources, including lower price neighboring states, the internet or other sources. Following the steep decline in sales immediately after an increase in the cigarette excise tax, sales rise again to settle at a new, generally lower, level than before the tax increase. The increase in sales following the initial drop is likely due to smokers returning to established cigarette purchasing habits (e.g., buying by the pack at nearby convenience stores) after using up stockpiles. In the long run, higher cigarette taxes reduce smoking among adults and especially among youth (Chaloupka and Warner, 1999). Figures 3 and 4 illustrate the sales and revenue trends for the state of Wyoming. From 1999 through June 2003 cigarette consumption more or less maintained an average pattern (with some seasonal variation) until the cigarette tax was increased from $0.12 to $0.60 in July Cigarette consumption is shown as the total number of cigarette packs sold. As there is always a tendency to buy more before a declared tax increase, the graph shows a dramatic jump right before the tax increase. After the tax increase the consumption trend declines slightly. This pattern of change is very similar compared to other states (see Appendix A). The simple arithmetic post-tax average (12 months: July 03-Nov 04) consumption was reduced by % compared to the pre-tax average (52 months: Jan 99-April 03; excluding May and June 2003). Also the simple arithmetic post-tax average (12 months: July 03 - Nov 04) revenue increased by % compared to the pre-tax average (52 months: Jan 99-April 03; excluding May and June 2003). Figure 4 shows that the tax revenue, which was fairly stable around $500,000, rose markedly following the tax increase. Figures 5 and 6 show the post-tax monthly sales and revenues respectively, compared to the pre-tax average of similar months. Figure 7 illustrates the sales pattern of other tobacco products for Wyoming. The sales of other tobacco products such as spit tobacco, declined after the tax increase but currently show an increasing sales trend. However, the data available on these products are not as detailed as the cigarette data. Quarterly rather than monthly information means it is premature to identify a definite trend. Also, dollar sales rather than unit sales mean that

9 WYSAC, University of Wyoming Impact of Cigarette Tax Increase the increase in the most recent quarter may confound rising unit prices with actual change in consumption. Figure 3: Monthly Sales for Wyoming (in packs) Total Cigarette Sales In Wyoming Tax Increase in July 2003 (from $0.12 to $0.60) Actual Sales Projected Sales if Tax Not Enacted Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Source: Wyoming Department of Revenue Figure 4: Monthly Cigarette Excise Tax Revenue for Wyoming Total Cigarette Excise Tax Revenue in Wyoming Total Tobacco Tax Revenue Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Tax Increase in July 2003 (from $0.12 to $0.60) Actual Revenue Projected Revenues if Tax not Enacted Source: Wyoming Department of Revenue.

10 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Figure 5: Comparisons of Pre and Post Tobacco Tax Average Sales Comparison of Pre and Post Tax Average Monthly Sales Cigarette Sales (Packs) Pre-Tax Monthly Average Sales (Jan'1999- June'2003) Post-Tax Average Sales from July'2003- November'2004 January March May July September November Source: Wyoming Department of Revenue. Figure 6: Comparisons of Pre and Post Tobacco Tax Revenue Comparison of Pre and Post Tobacco Tax Revenue Tax Revenue Pre Tax Monthly Average Tax Revenue (Jan'1999- June'2003) Post-Tax Average Revenue from July'2003- November' January March May July September November Source: Wyoming Department of Revenue.

11 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Figure 7: Other Tobacco Quarterly Sales/Consumption for Wyoming Other Tobacco Products Sales Total Value of Sales 660, , , , , , , Tax Increase in July 2003 (from $0.12 to $0.6) Other Tobacco Product Sales 520, nd qtr rd qtr th qtr st qtr nd qtr 2004 Source: Wyoming Department of Revenue. Wyoming and the Neighboring States Wyoming ranks in the middle in terms of cigarette tax rates when compared to other states. Except Utah, states surrounding Wyoming are similar in terms of youth and adult smoking rates (see Table 1). Colorado had similar smoking rates despite a very low tax rate (20 cents) but now, following the November 2004 election and the adoption of amendment 35, the tax rate is 84 cents (64 cents increase) per pack (Purdy, 2004). Wyoming s total consumption is low compared to neighboring states because of Wyoming s low population. The Campaign for Tobacco-Free Kids performed a projection study (Table 2) based on research findings that every 10% price increase produces a 4% decline in cigarette purchases and at least a 6.5% decline in youth smokers if tax rates are adjusted for inflation over time, with additional adjustments to account for possible new cigarette smuggling or smoker tax avoidance prompted by the cigarette tax increases. All estimates are rough projections based on the best available data and research. If we increase the tax by 50 cents (hypothetically for illustrative purposes) in all the neighboring states (including Wyoming), then Table 2 projects how that may affect the existing situation.

12 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Table 1: STATE CIGARETTE TAX RATES & RANK, DATE OF LAST INCREASE, ANNUAL PACK SALES & REVENUES, AND RELATED DATA: Wyoming and neighboring states. State Cigarette Tax by Pack National Rank 1= high Date of last state tax increase FY 2002 Cigarette Pack (millions) FY 2002 Cigarette Tax Revenue (millions) Retail Price per Pack with all taxes CDC St. Smoking Costs per pack sold Adult smokers Youth Smoking Rate Adult Smoking Rate Adult Smoking Rank (1= low) WY $ th 7/1/ $5.1 $3.50 $ , % 22.2% 18 UT $ th 5/6/02 91 $47.1 $3.73 $ , % 13.3% 1 SD $ th 4/1/ $17.5 $3.49 $ , % 22.4% 20 NE $ th 10/1/ $43.5 $3.82 $ , % 20.4% 5 MT $1.70 4th 1/1/ $11.7 $3.49 $ , % 21.9% 13 ID* $ th 6/1/ $23.4 $3.38 $ , % 19.7% 3 CO $ nd 1/1/ $56.2 $3.01 $ , % 22.4% 19 *Idaho reverts to a tax level of 28 cents per pack 7/01/2005. Source: Campaign for Tobacco-Free Kids Table 2: STATE CIGARETTE TAXES & PROJECTED EFFECT OF INCREASING THEM: Wyoming and neighboring states States Proposed Tax Increase (per pack) Additional Cigarette Tax Revenue (millions/yr) Fewer Adult Smokers Fewer Future Kid Smokers Kids Saved From Early Smoking Death Five-Year Heart- Stroke Health Savings (millions) Five-Year Pregnancy & Birth Savings (millions) Long-Term Health Savings (millions) WY 50 $ $0.7 $0.8 $64.1 UT 50 $ $1.5 $2.0 $171.2 SD 50 $ $1.1 $1.2 $98.4 NE 50 $ $2.1 $2.0 $204.8 MT 50 $ $1.3 $1.1 $88.5 ID 50 $ $1.7 $1.2 $161.6 CO 50 $ $7.3 $4.0 $537.0 Sources: Orzechowski & Walker, Tax Burden on Tobacco, Campaign for Tobacco-Free Kids.

13 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Cigarette tax increases boost state revenues despite lower sales because the increased tax per pack brings in more new revenue than is lost from the decrease in the number of packs sold. Sales tax revenues also typically increase in the vast majority of states that apply their sales tax percentage to all of the underlying retail prices, including cigarette taxes. Five-year heart-stroke health savings are from fewer smoking-caused heart attacks and strokes, and these savings grow rapidly beyond the initial five-year period. There are also many other short-term savings from tax-prompted smoking declines. Long-term savings accrue over the lifetimes of those alive today that quit or do not start smoking because of the cigarette tax increase. Economic Cost of Smoking for Wyoming The U.S. Centers for Disease Control & Prevention estimate that smoking-caused health costs nationwide total $7.18 per pack sold in the United States. According to the latest WYSAC Baseline and Trends Report (2003), in Wyoming in 1998, $106 million was spent in 1998 on health care costs directly related to smoking. The Center for Disease Control and Prevention s Smoking Attributable Mortality, Morbidity, and Economic Costs [SAMMEC] data (Report, 2001) shows that in Wyoming, smoking led to: o 807 premature deaths in 1999, including 258 cardiovascular disease related deaths, 287 respiratory deaths, 256 cancer deaths, and 6 other related deaths. o 10,454 years of potential life lost for the 807 smoking attributable deaths in Wyoming (based on average life expectancy in the U.S.). o A loss of future earnings of $65,000,000 from smoking-attributable premature mortality in Wyoming. Environmental Threats to Revenue Maximization The very low tax rates in U.S tobacco producing states and the increased tax differential between neighboring states have led to renewed concern over tax evasion (Bartlett, 2002; Fleenor, 1998, 2003; Farrelly et al., 2002) and long distance smuggling. Also, the ongoing increase in internet sales of tobacco products is a major loophole that potentially reduces the impact of state cigarette excise taxes. The possibility of cigarette tax evasion and smuggling remains, but it is highly unlikely to cause significant revenue declines in Wyoming they may only slightly reduce the size of the state s revenue increase. However, curbing tax evasion and regulating internet sales might offer the state a means to further increase revenues.

14 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Conclusion Excise taxes levied on tobacco products typically reflect policymakers desire to balance improved health with increases in revenue. Tax policy aimed at containing tobacco consumption (deterrence) and at increasing revenue can successfully achieve both objectives. In order to offset the total social cost of smoking and to guarantee increased revenue, the optimal cigarette excise tax falls within a range that raises the total cost of cigarettes yet without completely flattening sales. Although increased taxes are a highly effective means of decreasing tobacco use and raising state revenue, this conclusion should serve as a reminder that increasing taxes is not a panacea. As a deterrent to tobacco use, tax increases will have the greatest impact when combined with other strategies designed to change societal norms and to help smokers quit. Currently, the average per pack tax for Wyoming and the six states on its borders is 80 cents. Wyoming s current cigarette excise tax (60 cents) falls within the range of state tax rates that reliably increase revenue and decrease consumption. The most current economic data from the Wyoming Department of Revenue clearly supports this claim. States with cigarette excise taxes higher than that of Wyoming, such as California (87 cents) and New York ($1.50) have successfully reduced consumption while increasing revenue (see Appendix A). Spit tobacco use in Wyoming is more than double the national average (WYSAC Baseline & Trends 2003). Increasing the excise tax on other tobacco products in Wyoming could similarly benefit the state by increasing revenue and by deterring adults and youth from using spit tobacco.

15 WYSAC, University of Wyoming Impact of Cigarette Tax Increase References Bartlett, B. (2002). Cigarette Smuggling. Brief Analysis No. 423, National Center for Policy Analysis. Campaign for Tobacco-Free Kids. (2004). Retrieved on September 14, 2004 from >> Chaloupka, F.J., and K.E. Warner. (1999). The Economics of Smoking. NBER Working Paper No. W7047. Cambridge, MA: National Bureau of Economic Research. Centers for Disease Control. (2001). Smoking-Attributable Mortality, Morbidity, and Economic Costs [SAMMEC] version 3.0 [software] Atlanta: U.S. Centers for Disease Control (1999). Decline in Cigarette Consumption Following Implementation of a Comprehensive Tobacco Prevention and Education Program Oregon (07): , February 26, From >> Fairclough, Gordon. (2002). Psst! Wanna Cheap Smoke?-Big Tax Rise in New York City Fuels Thriving Black Market in Illegal, Low-Tax Cigarettes. Wall Street Journal. Farrelly, M. C., Christian T. Nimsch, Joshua James. (2003). State Cigarette Excise Taxes: Implications for Revenue and Tax Evasion. RTI Project Number Research Triangle Park, NC 27709: RTI International. Farrelly, M.C., C.T. Nimsch, K.C. Davis, T. Woolery, and T. Pechacek. (2002). Cigarette Smuggling Revisited. RTI working paper. Fleenor, P. (2003). Cigarette Taxes, Black Markets, and Crime-Lessons from New York s 50-year Losing Battle. Policy Analysis, No Fleenor, P. (October 1998). How Excise Tax Differentials Affect Interstate Smuggling and Cross-Border Sales of Cigarettes in the United States. Background Paper, No. 26, Tax Foundation. Grossman, M. (1989). Health benefits of increases in alcohol and cigarette taxes. British Journal of Addiction, Vol. 84, pp Orzechowski, W., and R. Walker The Tax Burden on Tobacco. Historical Compilation, Volume 36, Arlington, VA: Orzechowski and Walker. Purdy, Penelope (September 19, 2004). Cigarette Tax Debated. The Denver Post, p. E1. Warner, K.E. (1987), ``Health and economic implications of a tobacco-free society, Journal of the American Medical Association, Vol. 258 No. 15, pp

16 WYSAC, University of Wyoming Impact of Cigarette Tax Increase WYSAC. (2003). Tobacco-Free Wyoming Baseline Data and Trend Report. University of Wyoming, Laramie, WY. Zimring, F.E. and Nelson, W. (1995), Cigarette taxes as cigarette policy, Tobacco Control, Vol. 4 No. 1, pp. s25-s33.

17 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Appendix A. Results from Other States Figure A1: Monthly Cigarette Sales in New York (in millions of packs) Source: Farrely et al., Figure A2: Monthly Cigarette Excise Tax Revenue for New York (millions of dollars)

18 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Source: Farrely et al., Figure A3: Monthly Sales for California (in packs) Source: Farrely et al., Figure A4: Monthly Cigarette Excise Tax Revenue for California Source: Farrely et al., 2003.

19 WYSAC, University of Wyoming Impact of Cigarette Tax Increase Figure A5: Monthly Sales for Utah (in packs) Source: Farrely et al., Figure A6: Monthly Cigarette Excise Tax Revenue for Utah (millions of dollars) Source: Farrely et al., 2003.