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Research & Commentary: Regressive Tax in New Mexico Will Punish Low Income Tobacco Users and Threatens Harm Reduction

February 15, 2019

Proposed increase in the excise tax on cigarettes and other tobacco products is regressive, fosters black markets and negatively impacts the public health gains tobacco harm reduction products provide.

Lawmakers in New Mexico introduced legislation that would increase the state’s cigarette and other tobacco products (OTP) taxes. The bill would also apply the OTP tax to e-cigarettes. Revenue from the proposed legislation would be distributed to the public school fund in 2020.

Although taxes on cigarettes are used to discourage smokers and promote public health, they’re often regressive and foster black markets. More troublesome is the extreme tax on vaping products, which will negatively impact public health.

The proposal aims to increase the excise tax on cigarettes from $1.66 for a pack of 20 cigarettes, to $3.16 per pack. The OTP tax would increase to 76 percent of the product value, from its current rate of 25 percent.

It is well known that cigarette taxes are highly regressive and disproportionately impact lower-income persons. A Cato Journal article found that from “2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income cigarettes.” Smokers that earned between $30,000 and $59,999 spent 4.3 percent, and those earning more than $60,000 spent 2 percent of their income on cigarettes.

Furthermore, increased taxes on cigarettes lead to black markets. According to the Tax Foundation, New Mexico ranked fourth in the country for cigarette smuggling in 2015. New Mexico already has higher smuggling rates than its neighboring states including Colorado and Texas, which ranked 21st and 8th, respectively. Arizona ranked 2nd, with a $2.00 per pack excise tax. The proposed legislation will make New Mexico’s cigarette tax the highest in the region.

Another troubling aspect of the bill is the application of an extreme excise tax on e-cigarettes, a tobacco harm reduction (THR) product. Research consistently finds that it is the smoke in combustible cigarettes that produces the most harms associated with cigarettes. E-cigarettes provide smokers nicotine in a vapor that is significantly less harmful, as found by numerous public health organizations including Public Health England, the Royal College of Physicians, the National Academies of Sciences, Engineering, and Medicine, and the American Cancer Society.

E-cigarettes are also useful tools to help people quit smoking, as indicated in a study that found e-cigarettes to be “twice as effective as nicotine replacement at helping smokers quit.”

More importantly, these products can actually help save states’ money by reducing health care costs. Analyzing a scenario where all smoking Medicaid recipients switched from combustible cigarettes to e-cigarettes found states could have saved $48 billion in 2012. A smaller analysis examined one percent of the Medicaid population switching, finding that Medicaid savings would “be approximately $2.8 billion per 1 percent of enrollees” over the next 25 years.

Although most states raise tobacco taxes in an effort to deter people from smoking, this proposal in New Mexico will not allocate any funding for cessation efforts. In 2018, New Mexico received $131.8 million “in tobacco settlement payments and taxes.” The state only allocated $5.7 million on tobacco education and prevention in the same year. Despite the fact that New Mexico was one of many states that settled with tobacco companies in the Master Settlement Agreement to recover the health care costs associated with smoking, the state uses this funding for other legislative items. In 2000, New Mexico received $769 in tobacco settlement payments, yet $748 million was “appropriated or withdrawn to meet legislative priorities.” New Mexico has also bonded out future tobacco payments, “with an outstanding balance of 417 million that depend on cigarette tax revenues for repayment.”

Rather than relying on cigarette smokers and vapers to fund public education, New Mexico should reform how it currently spends tobacco settlement payments and taxes. Lawmakers should also avoid extreme taxes on THR products, as research increasingly finds these products to be an effective and significantly safer alternative to combustible cigarettes.

The following documents provide more information on cigarette taxes and tobacco harm reduction.

Three Reasons to Avoid Tobacco Taxes
http://www.commonwealthfoundation.org/policyblog/detail/three-reasons-to-avoid-tobacco-taxes
Elizabeth Stelle of the Commonwealth Foundation examines Pennsylvania’s proposed tobacco tax hikes. Stelle argues they are the wrong prescription for the state, and she outlines several reasons why they are harmful.

Cigarette Taxes and Smoking
https://www.heartland.org/policy-documents/cigarette-taxes-and-smoking
In this study from the Cato Institute, Kevin Callison and Robert Kaestner suggest future  cigarette-tax  increases will offer relatively few public health benefits, and they say the justification given for future taxes should be based on the public finance aspects of cigarette taxes, such as the regressiveness, volatility, or the rate of revenue growth associated with those taxes.

Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
https://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-raise-tobacco-taxes
Heartland Institute Government Relations Director John Nothdurft argues targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned about the public health effects of tobacco should encourage the use of readily available smoking cessation products and services instead of supporting bad tax policy.

Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
https://heartland.org/policy-documents/five-things-consider-raising-tobacco-taxes-review-research
This Heartland Institute Policy Brief argues, “Tax increases above current levels are not justified by appealing to the costs smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”

Vaping, E-Cigarettes, and Public Policy Toward Alternatives to Smoking
https://www.heartland.org/publications-resources/publications/vaping-e-cigarettes-and-public-policy-toward-alternatives-to-smoking
For decades, lawmakers and regulators have used taxes, bans, and burdensome regulations as part of their attempt to reduce the negative health effects of smoking. Recently, some have sought to extend those policies to electronic cigarettes. This booklet from The Heartland Institute urges policymakers to re-think that tax-and-regulate strategy. Policymakers should be mindful of the extensive research that supports tobacco harm reduction and understand bans, excessive regulations, and high taxes on e-cigarettes often encourage smokers to continue using more-harmful traditional cigarette products.

Podcast Series: Voices of Vapers
https://www.heartland.org/multimedia/podcasts?fromDate=&toDate=&q=voices+of+vapers
In this weekly podcast series, State Government Relations Manager Lindsey Stroud talks with researchers, advocates, and policymakers about tobacco harm reduction and electronic cigarettes. The series provides important information about the thousands of entrepreneurs who have started small businesses thanks to THRs and the millions of adults that have used electronic cigarettes and vaping devices to quit smoking tobacco cigarettes.

Research & Commentary: Study Finds E-Cigarettes Would Prevent 6.6 Million Premature Deaths
https://www.heartland.org/publications-resources/publications/research--commentary-study-finds-e-cigarettes-would-prevent-66-million-premature-deaths
Heartland Institute State Government Relations Manager Lindsey Stroud examines an October 2017 Tobacco Control study that found electronic nicotine delivery systems (ENDS) might help extend life for millions of people. The authors of the study found there was an estimated 6.6 million fewer deaths and more than 86 million fewer-life-years lost over a ten year period because of ENDS products. Stroud concludes the use of ENDS could also help improve the budgets of numerous state programs, including Medicaid.

Research & Commentary: Public Health Officials Urge Use of Electronic Nicotine Delivery Systems
https://www.heartland.org/publications-resources/publications/public-health-officials-urge-use-of-electronic-nicotine-delivery-systems
Heartland Institute State Government Relations Manager Lindsey Stroud notes the importance of NHS Health Scotland’s joint statement encouraging the use of electronic nicotine delivery systems (ENDS) as an alternative to tobacco products. NHS Health Scotland, Public Health England, and other groups have found ENDS are 95 percent less harmful than tobacco cigarettes.

Research & Commentary: Randomized Trial Finds E-Cigarettes Are More Effective Smoking Cessation Tool Than Nicotine Replacement Therapy
https://www.heartland.org/publications-resources/publications/research--commentary-randomized-trial-finds-e-cigarettes-are-more-effective-smoking-cessation-tool-than-nicotine-replacement-therapy
Lindsey Stroud, a State Government Relations Manager at The Heartland Institute examines a study in The New England Journal of Medicine that finds e-cigarettes and vaping devices to be twice as effective as nicotine replacement therapy (NRT) in helping smokers quit cigarettes. Nearly 700 participants were studied over a 52-week period, with researchers finding that 18 percent of e-cigarette users reported abstinence, compared to 9 percent of those using NRT. Stroud writes that “these latest findings provide more valuable information on the public health role that e-cigarettes and vaping devices provide for the 38 million cigarette smokers in the United States,” an implores policymakers to regulate these devices in a way that promotes their usage.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, our Consumer Freedom Lounge, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Lennie Jarratt, Heartland’s state government relations manager, at ljarratt@heartland.org or 312/377-4000.

Author
Lindsey Stroud joined The Heartland Institute in 2016 as a Government Relations Coordinator. In 2017, Lindsey was named State Government Relations Manager.
lstroud@heartland.org