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Some states profit
from cigarette tax next door
Big increases are
prompting smokers to cross the line
THE WALL STREET JOURNAL
Saturday, March 3, 2007
Some smokers are
willing to drive long distances to buy cheaper cigarettes.
LARCHWOOD, Iowa.
Since Jan. 1, this town of 800
in the northwest corner of Iowa has been deluged with thousands of
visitors, and they haven't come to see the sights. It's for the smokes.
On the first day of 2007, the
cigarette tax in the neighboring state of South Dakota jumped from 53
cents a pack to $1.53, making a carton cost at least $11.70 more than a
carton in Iowa. Immediately, hordes of South Dakotans crossed the border
into Iowa, many of them heading for Larchwood, a 20-mile drive from Sioux
Falls, South Dakota's largest city.
Julie Carter, a waitress from
Sioux Falls, said she makes weekly trips to Larchwood to buy one or two
cartons of Winston Lights or Pall Mall along with "munchies and
pop." She begrudges the tax hike at home but said she enjoys the
"nice drive in the country." And because of people like her, in
the month of January, Larchwood Mini Mart sold $160,000 worth of
cigarettes, triple the amount sold all of last year. "It's a gold
rush," owner Larry Zuraff said.
It's happening elsewhere. In
the past six years, about 43 states, as well as dozens of cities and
counties, have raised cigarette taxes, sometimes by $1 a pack (or $10 for
a carton of 10); that has created greater price differentials and
increased the incentives for heavily taxed smokers to drive great
distances for cheaper smokes, particularly in lower-income areas. For many
years, people have crossed state borders for cheaper liquor, gasoline and
cigarettes. Michael Lovenheim, a graduating University of Michigan
doctoral student in economics, estimated that as of 2002, before the
latest round of tax increases, 13 percent of smokers crossed state borders
to buy cheaper cigarettes.
Today, other recent boomtowns
attributed to cigarette-tax increases include Sunland Park, N.M.,
population 16,000, where the difference from neighboring El Paso, Texas,
as of Jan. 1, is about $5 a carton.
Texans have descended upon
Sunland Park's only tobacco shop, which has seen a fivefold increase in
cigarette sales, up to 4,500 packs a week. That helps the town because of
a 2-cent-a-pack municipal tax on top of a 0.7 percent municipal sales tax.
Hudson, Wis., a town of about
11,000 about 20 minutes from downtown St. Paul, Minn., has seen an influx
of smokers from Minnesota since mid-2005, when that state's cigarette tax
jumped to more than $7 a carton higher than Wisconsin's. Visitors from the
Twin Cities, where smoking at restaurants is banned, are taking advantage
of Hudson's smoking-friendly haunts.
Federal cigarette taxes were
first enacted in the mid-1800s and today stand at $3.90 a carton. On the
state level, cigarette taxes date back to the early 1920s in Iowa, and the
first major wave of increases took place during the Great Depression,
according to the now-defunct U.S. Advisory Commission on Intergovernmental
Relations.
State governments often tout
cigarette taxes as a public-health initiative - a way to force some people
to quit and to reap revenue from those whose habit leads to
smoking-related illnesses.
Most states raised cigarette
taxes as a way to balance their budgets during hard times.
A 1964 surgeon general's
report on smoking-related health problems spurred a new wave of state
cigarette-tax increases, tripling the average to $1.55 a carton by 1984.
Another round of increases began during the recession of the late 1980s
and early '90s and, most recently, during the economic downturn after the
Sept. 11 terror attacks.
More than 378 billion
cigarettes were sold in the U.S. in 2005, according to the Treasury
Department. The percentage of adults who smoke stands at about 20 percent,
down from more than half in the 1960s, according to the Centers for
Disease Control and Prevention.
States raised a collective $14
billion from cigarette taxes for the fiscal year ended last June 30, but
studies have pegged the percentage of revenue lost because of smuggling,
Internet sales or other forms of tax evasion at anywhere from less than 10
percent to more than 20 percent.
Southeastern states have
always had the lowest cigarette taxes, which has led to long-distance,
organized smuggling from North Carolina ($3 tax per carton), for example,
to states such as New Jersey ($25.75), where they are sold to retailers.
The black market also includes counterfeit cigarettes from countries such
as China.
Indian tribes, which aren't
required to charge state levies, have been major beneficiaries of the tax
increases. For years they have enticed nontribal members to buy from
stores on their land or on the Internet, depriving states of revenue.
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