Tobacco smuggling would triple, and nearly half the cigarettes used in Kansas would be illicit, if the Legislature approves Gov. Sam Brownback’s request for a $1.50-a-pack tax increase, according to data released Monday by a Michigan research group.
The tax increase would raise the smuggling rate in Kansas from about 15 percent of cigarettes consumed to 46.5 percent, says the estimate from the Mackinac Center for Public Policy, a free-market-oriented think tank that annually researches cigarette smuggling in conjunction with the Tax Foundation, a Washington-based tax policy research organization.
If the tax passes, sales of legal, tax-paid cigarettes in Kansas would drop by 37 percent, Mackinac projected.
In addition to its regular annual data analysis, “we used our model to do a what-if on Kansas” as the Legislature considers Brownback’s request to raise the cigarette tax from 79 cents a pack to $2.29 a pack, said Michael LaFaive, director of the Mackinac Center’s fiscal policy research wing.
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“I wanted to see what would happen to smuggling rates if it were adopted as proposed,” LaFaive said.
Brownback’s budget forecasts the tax increase would bring the state an additional $80 million next year. Mackinac estimates that with the impact of smuggling, the tax would bring in $70 million at most.
That’s been the experience in other states that raised their cigarette taxes and then saw substantial drops in legitimate taxed sales, said Scott Drenkard, Tax Foundation economist and a co-author of the smuggling study.
The Tax Foundation has been and continues to be critical of Brownback’s tax plan, especially a provision that eliminated state income taxes for owners of limited liability companies, sole proprietorships and corporations organized under subchapter S of the federal tax code.
Tax revenues this year and last have fallen dramatically and consistently underperformed estimates, even after the estimates were lowered in November. At present the state faces a budget gap of about $1 billion over the next 1 1/2 years.
In addition to raising the cigarette tax, Brownback also proposes to raise money by increasing alcoholic beverage taxes and eliminating some income tax breaks, including the home mortgage interest deduction.
“It’s very hard to build your budget on top of cigarette taxes,” Drenkard said. “You’ll definitely make a lot less than you expect to.”
Brownback was traveling Monday and his office did not have any immediate comment.
Basis for projections
The Mackinac Center reported that in 2013, the last year of full data, an estimated 20 million packs of cigarettes were smuggled into Kansas from other states and tribal lands. That number would rise to about 64 million packs if the cigarette tax passes, the report said.
LaFaive said Mackinac is able to project increases in smuggling for Kansas based on other states’ experience. Illinois, for example, saw nearly a 20-point jump in smuggling after adding $1 a pack to the state cigarette tax.
A Tax Foundation report released Monday shows that 30 states, including Kansas at No. 19, are net importers of smuggled smokes. By Mackinac’s estimate, Kansas would move into the top five if the cigarette tax passes.
The report identified 17 states that are net exporters of cigarettes. Missouri, a popular destination for Kansans seeking cheaper smokes, ranks No. 9 on that list. Data was not available for Alaska, Hawaii and North Carolina, the report said.
Overall smuggling rates are derived by comparing data on cigarette consumption from the Centers for Disease Control and Prevention with tax data obtained from the states, LaFaive said.
“If there’s a gap there, we think it has to be explained somehow,” LaFaive said. “If the smoking rate is ‘x’ and legal paid sales are ‘y,’ and they’re really different … we explain that by pointing to the smuggling effort.”
The report covers both casual and commercial cigarette smuggling.
Casual smuggling is defined as individuals buying cigarettes in another state or on Native American lands and taking them home for personal use. Commercial smuggling is purchasing cigarettes in van or truck lots in low-tax states and shipping them to high-tax states for sale on the black market.
It is legal in Kansas to buy a single carton at a time out of state or at a tribal smoke shop and bring it home for personal use.
“Anything more than that is illegal,” said Jeannine Koranda, spokeswoman for the state Department of Revenue.
The Tax Foundation report shows a near-direct correlation between the tax rate on cigarettes and the amount of smuggling.
The highest state in the nation for cigarette smuggling is New York, where the state tax is $4.35 a pack and local areas, especially New York City, levy additional taxes driving the cost of a pack of cigarettes to about $14.
New Hampshire, the state with the highest export rate of smuggled cigarettes, levies $1.68 cents tax per pack, which is low for a northeastern state. Missouri has the lowest state tax on cigarettes in the nation at 17 cents a pack.
In Wichita, a 10-pack carton of 200 bargain cigarettes costs about $35 to $40. The additional tax would add $15 a carton, raising the price of the cheapest cigarettes in the area to about $50.
In Missouri and on tribal lands, a carton of bargain-brand cigarettes costs about $20 to $25.
Reach Dion Lefler at 316-268-6527 or firstname.lastname@example.org.
Comparing Kansas and its neighbors
The following are states’ tax rates on a pack of cigarettes, and the percentage of cigarettes smuggled into or out of the state:
Kansas: 79 cents tax; 15 percent smuggled in
Missouri: 17 cents tax; 13.5 percent smuggled out
Oklahoma: $1.03 tax; 3 percent smuggled in
Colorado: 84 cents tax; 13.5 percent smuggled in
Nebraska: 64 cents tax; 2.8 percent smuggled in
Source: The Tax Foundation