Arkansas Reduces Its Cigarette Tax On Its Borders

April 10, 2009

We just finished a study detailing an interesting new law regarding Arkansas’s cigarette tax. The state’s General Assembly recently passed legislation to increase the state’s cigarette tax from $0.59 to $1.15 per pack. Included in the legislation was a rule that reduces the state’s cigarette tax rate if a town on the state line borders a town outside the state that has a lower cigarette tax rate. In addition, any cigarettes sold at a store within 300 feet of the state line are also subject to a lower tax rate if the bordering state’s rate is lower. In both of these cases, the lower rate is equal to the out-of-state jurisdiction’s rate plus 3 cents.

The law is designed to keep residents of Arkansas from crossing state lines to purchase cigarettes in lower-tax jurisdictions and bringing them back to Arkansas. This activity, commonly called border shopping, is illegal and can be a significant problem when states have high cigarette taxes. State lawmakers often ignore the effect that high cigarette taxes have on illegal activities such as border shopping, smuggling, internet purchases, and other illegal tax evasion methods. The low-tax border zone policy is a first in the US and represents an explicit acknowledgement of the problem of border shopping caused by high cigarette taxes. It seems the law is designed to keep cigarette buyers in state by giving those close to the border a break on taxes. Depending on how successful the law is at stemming border shopping and increasing revenue, other states may try similar strategies to deal with the problem.

The policy went into effect on March 1. In addition to the 300-foot -wide strip of land around the border that qualifies for a reduced rate, the towns and cities that qualify are Blue Eye, Bonanza, Fort Smith, Garfield, Gateway, Holiday Island, Junction City, Mammoth Spring, Oak Grove, Pea Ridge, Siloam Springs, Van Buren, and West Memphis:

View Arkansas Border Cities in a larger map

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