Competing visions for tobacco taxes are on display in two cigarette taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase initiatives on the ballot in Colorado and North Dakota. Proponents of tobacco tax hikes in both states tout public health outcomes, but while a Colorado initiative seeks to secure these gains, at least in part, by dedicating a substantial share of new revenue to smoking cessation and other health measures, the North Dakota initiative relies on the higher taxes themselves to reduce smoking, while devoting most of the revenue to the general fund and programs unrelated to smoking.
Both states’ voters will be contemplating substantial tax increases. In North Dakota, where the excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on cigarettes currently stands at 44 cents per pack, voters are being asked to raise the rate to $2.20 a pack (Measure 4). A proposed constitutional amendment in Colorado would increase the levy from 84 cents per pack to $2.59 a pack (Amendment 72).
Only a minimal share of revenue from the North Dakota cigarette tax increase would go to public health, even though health outcomes are at the top of the list for proponents of the tax increase, particularly for the pro-Measure 4 organization Raise it for Health ND. By contrast, most of the funding for the proposed cigarette tax increase in Colorado is earmarked for public health services.
Tobacco use is declining nationwide and has been for some time. In 1965, a full 42 percent of Americans were regular smokers. Today, 19 percent of Americans—18.7 percent of North Dakotans and 15.6 percent of Coloradans—are regular smokers, according to the Center for Disease Control. And the slide isn’t over yet. The Department of Health and Human Services is targeting a 12 percent rate for 2020.
Policymakers impose excise taxes on tobacco for a variety of reasons, some of them potentially in conflict with each other. Some seek to induce behavioral effects, using taxes as a means to increase the costs, and thereby decrease the incidence, of smoking. Others see cigarette taxes as a means of paying for the state’s share of the health costs of tobacco use. And still others regard it as a source of revenue more generally.
The problem, of course, is that to the extent that cigarette taxes reduce consumption, state revenue falls. Even absent those effects, tobacco consumption is clearly declining, which undercuts any hopes of long-term revenue stability.
Estimates of price elasticity vary greatly. A number of studies have pegged elasticity between -0.2 and -0.6, meaning that for each percent increase in the price of cigarettes, there will be a reduction in consumption between two- and six-tenths of a percent. Others, however, have questioned this assumption; a Cato Institute analysis in 2014 estimated an elasticity of -0.065, which would suggest that factors exogenous of cost are driving reduced demand for cigarettes. But whether higher taxes reduce consumption overall, they can certainly shift the point of sale, due to both cross-border shopping and organized cigarette smuggling—particularly if rates are climbing past $2 per pack. (More on cigarette smuggling here.)
The North Dakota Office of the Tax Commissioner prepared a fiscal impact report on the proposed tax increase in that state, writing that the tax would increase the average price of cigarettes by 33 percent, reduce direct cigarette consumption by 19.8 percent, and forego another 5 percent to cross-border activity, resulting in a projected 24.8 percent reduction in sales of tobacco products in the state. A parallel tax on liquid nicotine products, like e-cigarettes, would reduce in-state purchases by an estimated 22 percent.
If adopted, both Colorado Amendment 72 and North Dakota Measure 4 would raise revenue—for now. With tobacco use rapidly declining, however, neither offer reliable revenue streams for the long haul.