A Significant Cigarette Tax Rate Increase in Ohio Would Produce a Large, Sustained Increase in State Tobacco Tax Revenues
State cigarette and other tobacco tax revenues are among the most predictable, steady, and reliable revenues that states receive. While these revenues do decline gradually over time as smoking and other tobacco use declines, the reductions in revenue are modest, predictable, and more than offset by the related reductions in public and private sector health care costs and other economic costs caused by smoking.
In general, state cigarette tax revenues increase sharply following a significant increase to a state’s cigarette tax rates (despite the smoking declines prompted by the tax increase and any related increases in tax avoidance or evasion), and then tend to decline slowly year to year as cigarette smoking continues to go down in response to other factors (e.g. stronger public policies targeting tobacco use). However, any decline in revenues from smoking reductions will be offset by related declines in tobacco-related healthcare costs burdening the state. For instance, the Campaign for Tobacco-Free Kids and the American Cancer Society Cancer Action Network project that a $1.00 per pack cigarette tax increase in Ohio will prevent 65,000 youth from becoming adult smokers, encourage 73,100 adults to quit, prevent 40,100 future smoking-caused deaths, and save the state $2.67 billion in future health care costs.
Ohio, like other states, has enjoyed substantial revenue increases each time it has raised its cigarette tax rate. Due to other factors following the last state tax increase, Ohio’s cigarette tax revenues declined greater than typically expected each year. This can be explained by ongoing smoking declines in the state, fortified by the statewide smoke-free law implemented in December 2006 and by the large federal tobacco tax increases in early 2009, which significantly reduced smoking and other tobacco use nationwide. But it also appears that Ohio’s revenue declines in each of the years since its last increase in 2005 were even larger because Ohio failed to raise its tax rates on all other tobacco products when it raised its cigarette tax. Because of those unequal rates, some regular cigarette smokers have likely been evading the new, higher cigarette tax rate by switching to much lower taxed roll-your-own cigarettes, little cigars and the like – and every time a regular smoker switches to some other lower-taxed tobacco product Ohio loses revenue. Setting Ohio’s tobacco tax rates so that all tobacco products are taxed at parallel levels would eliminate that problem and bring in additional state revenues. The Campaign for Tobacco-Free Kids and the American Cancer Society Cancer Action Network estimates that raising Ohio’s low 17 percent wholesale price tax rate on other tobacco products to parallel a new $2.25 per pack cigarette tax rate would bring in another $93 million per year in new state revenues.
In addition to increasing its cigarette tax rate and creating tax equity among all tobacco products, there are a number of steps that Ohio could take to protect or even increase its tobacco tax revenues over time. For example, Ohio could implement high-tech tax stamps to ensure that taxes are paid and to prevent cigarette smuggling and tax evasion. States can also minimize tobacco product smuggling and other tax evasion through such measures as making sure smokers understand the state’s laws pertaining to tobacco tax evasion, increasing penalties for smuggling and other tax evasion, and directing a portion of all penalties to help fund expanded enforcement (which would bring in both more penalty payments and more tobacco tax revenues).
Despite the declines, Ohio is still receiving additional new cigarette tax revenues in excess of $200 million per year compared to what it received right before it last increased its cigarette tax rate. That same basic pattern, with large amounts of new state revenues in every future year, would occur again if Ohio increased its cigarette tax rate significantly in 2015 – and the new revenues would be even larger if Ohio also equalized all its tobacco product tax rates at the same time.
Even if Ohio’s cigarette sales declined by five percent a year after the initial $342 million in new revenues estimated from the rate increase, the state would still be receiving more than $275 million in additional new annual cigarette tax revenues five years after the increase compared to what it received in 2015, and would have received more than $1.5 billion in total new annual revenues over that five year period compared to what it would receive with no rate increase.
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Topics: Cost-effectiveness / Tax levels and structure / Tobacco taxes revenues / Impact on demand / Economic impact of tobacco control / Tax avoidance and evasion / Tax and price / Impact on the poor / Jobs and productivity
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