Fifteen years ago, at the end of the legislative session, Kansas Gov. Bill Graves faced a familiar situation: a large budget gap and a legislature reluctant to raise taxes or reduce spending.
With time running out the governor latched on to what seemed to be an easy solution: Hike the cigarette tax.
Supporters of the hike conceded that legal, tax-paid sales would decline as more Kansans got their packs in neighboring states or online, and so-called “buttleggers” illegally imported low-tax cigarettes. Nevertheless, they insisted that the higher tax would help balance the budget and bring in even more revenue as smokers resumed their old buying habits.
As it turned out, this was all a pipe dream. Tax-paid sales fell by more than double what forecasters predicted and have remained at a depressed level ever since. Two years ago, an additional 50-cent per pack hike only worsened this trend.
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And the harmful effects of these tax hikes extend far beyond lost cigarette tax revenue. Since smokers frequently buy other items, such as gas and groceries, when purchasing cigarettes, Kansas businesses lost those sales as well. “If they’re not coming in for cigarettes, they’re not going to buy other stuff here,” lamented one retailer near the state line in Wathena.
Depressed sales and shuttered businesses mean less sales and income tax revenue, as well as increased payouts for unemployment compensation. Since the value of retail space is a function of its ability to generate sales, state and local property tax collections have also taken a hit.
Now Gov. Sam Brownback, a man who claims to understand the far-ranging effects of fiscal policy, wants to almost double the tax to $2.29 per pack. Not only will this worsen the state’s problems with border-shopping and illicit sales, it will also shift more of the tax burden to low- and moderate-income taxpayers.
Today the average pack of cigarettes costs $5.79 in Kansas, more than half ($3.47) of which are government taxes and fees. This means a pack-a-day smoker pays more than $1,250 annually in just tobacco taxes. Under the governor’s proposal, this would jump to more than $1,800.
Not only are current tobacco taxes high, they’re also extremely regressive, meaning they place a much heavier burden on the poor than well off.
Consider a Marion County farm worker making $18,000 annually who smokes a pack of cigarettes a day. Under current law he pays 7 percent of his income in tobacco taxes. Under the governor’s proposal, this figure would climb to more than 10 percent. Contrast this with the burden placed on a mid-level manager making $80,000 at a financial services firm in Overland Park who also smokes a pack a day. Her tobacco tax burden is currently just 1.6 percent of her income and would rise to 2.3 percent under the governor’s proposal.
Brownback has long argued that high income taxes harm a state’s economy and can be self-defeating from a revenue standpoint. Kansas’ decade and a half experiment with high cigarette levies demonstrates the same holds true for these taxes.
There are no easy solutions to Kansas’ budget woes. Some, however, are better than others. Further increasing one of the most disruptive and unfair taxes on the books will harm all Kansans, smokers and nonsmokers alike.
Patrick Fleenor is chief economist of Fiscal Economics Inc., a taxation policy consulting firm.