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Oregon Considers Tobacco Tax Hikes Montana and South Dakota Reject

January 30, 2019

Voters in November rejected ballot measures to increase tobacco taxes in Montana and South Dakota, while Oregon Gov. Kate Brown’s proposed budget includes a tobacco tax hike.

In the face of voters in nearby Montana and South Dakota rejecting ballot measures to increase tobacco taxes, Oregon Gov. Kate Brown is including a tobacco tax hike in her proposed budget.

In South Dakota, a proposal put on the November 2018 ballot by petition would have increased the tax on a pack of cigarettes by one dollar, from $1.53 to $2.53.

In Montana, a measure placed on the ballot by petition would have increased the cigarette tax two dollars, from $1.70 to $3.70, and would have expanded the tax to vapes and to other tobacco products, such as snuff.

Doubling Down in Oregon

Brown recommends more than doubling Oregon’s tobacco tax in her budget proposal for the next three years.

The 2019-2021 budget marks the first time Brown has proposed raising tobacco taxes since she unsuccessfully tried to increase taxes on cigarettes by 85 cents per pack two years ago.

Oregon’s tax on cigarettes is currently $1.33 per pack. Brown proposes a $2 increase, more than doubling the tax to $3.33 a pack. The increase would put Oregon’s cigarettes significantly above the national average tax of $1.68 per pack.

Brown would also extend the tax on cigarettes to vapes and to other tobacco products.

Funding State Government

In Oregon, as in Montana’s rejected proposal, the taxes would be used to help cover the rising costs of the state’s Medicaid program. In South Dakota, the money would have funded tuition reductions at the state’s four technical higher-education institutes and general state spending.

It is notable none of the proposed taxes are intended primarily to fund smoking cessation efforts, says Lindsey Stroud, state government relations manager at The Heartland Institute, which publishes Budget & Tax News.

“It is pretty significant that both measures were rejected, as states have increasingly relied on tobacco taxes to fund programs other than cessation efforts,” Stroud said. “For instance, in 2018, states used only about 3 percent of the revenue generated from tobacco lawsuits and taxes on cessation efforts.”

States depending on tobacco tax revenues are setting themselves up for budgetary trouble, says Stroud.

“The problem is, tobacco revenues continue to decrease, so relying upon them for programs is very poor fiscal responsibility,” said Stroud.

‘Opportunities for Avoidance’

Tobacco excise taxes are ineffective in deterring smoking and can increase crime, says Dr. Brad Rodu, a senior fellow of The Heartland Institute and a researcher in tobacco harm reduction at the University of Louisville.

“State governments are not at liberty to increase excise taxes without consideration of the adverse effects of tax avoidance via smuggling and cross-border purchases,” Rodu said.  “Economists have documented that large differences in cigarette excise taxes between neighboring jurisdictions provide opportunities for avoidance by affected consumers.

“Instead of quitting, smokers can avoid high taxes by buying cheaper, contraband cigarettes smuggled from low-tax locations and/or by direct cross-border purchasing,” said Rodu.

Taxing Safer Alternatives

Both Montana and Oregon have proposed expanding tobacco taxes to other products, including e-cigarettes. Such policies are bad for the public health, because e-cigarettes are a healthier alternative to smoking, says Rodu.

“These vastly safer cigarette substitutes should not be taxed, so that smoking rates won’t just dwindle but instead plummet,” Rodu said.

Stroud likewise says e-cigarettes are part of the solution when it comes to improving smokers’ health.

“States should discourage the use of tobacco products, but not through regressive taxes and regulations,” Stroud said. “They should also embrace disruptive technologies such as e-cigarettes and vaping devices, which have helped approximately three million smokers quit combustible cigarettes,” Stroud said.

“E-cigarettes and vaping devices are 95 percent less harmful than combustible cigarettes,” Stroud said. “Ironically, Montana’s proposal included a tax on e-cigarettes to pay for Medicaid expansion, yet [the think tanks] R Street and State Budget Solutions have found these products can actually save millions of dollars on state Medicaid budgets.”

Targeting Low-Income People

Cigarette taxes primarily land on those with low incomes, says Stroud.

“Tobacco taxes disproportionately impact lower-income persons,” Stroud said. “Approximately one in four adults living below the poverty line smoke. Medicaid recipients smoke at almost twice the rate of adults with private insurance or Medicare.”

Increased cigarette taxes also create incentives for black markets, says Stroud.

“Montana already ranks higher than its neighboring states for cigarette smuggling, and an increased tax would have continued that trend or made it worse,” said Stroud. “South Dakota also ranked pretty high on the list for cigarette smuggling, and its current tax is already higher than four of the six states bordering it.”

‘Simply a Tax Grab’

Many workers and ranchers in rural South Dakota smoke or chew tobacco, says state Sen. Stace Nelson, and they would be taxed to provide a free college education for others.

“There are plenty of South Dakotans that chew or smoke tobacco who have their own student loans they have to pay for,” said Nelson. “Instead of allowing them to take care of their own loans, we’re going to hit them a little bit harder by taking more money out of their pockets.”

In addition to tuition costs, a large percentage of the tax would have gone to the state’s general fund. Proponents of the South Dakota tax hike didn’t promote any effect on smoking cessation, says Nelson, but focused instead on education spending.

“They’ve been brazen about the fact that this is simply a tax grab,” Nelson said.

 

Ben Dieterich (bdietderich@hillsdale.edu) writes from Hillsdale, Michigan.

 

Official Connections

 

South Dakota state Sen. Stace Nelson (R-Fulton): https://sdlegislature.gov/Legislators/Legislators/MemberDetail.aspx?Session=2019&Member=1430&Cleaned=True

Internet Info

Jesse Hathaway, “The Trouble with Tobacco Taxes (Guest: SD State Sen. Stace Nelson),” Heartland Daily Podcast, October 30, 2018:

https://www.heartland.org/multimedia/podcasts/the-trouble-with-tobacco-taxes-guest-sd-state-sen-stace-nelson

Author
Benjamin Dietderich writes from Hillsdale, Michigan.
bdietderich@hillsdale.edu