RESPONSES TO MISLEADING AND INACCURATE CIGARETTE COMPANY ARGUMENTS
AGAINST STATE CIGARETTE TAX
INCREASES
Whenever
an increase to a state’s cigarette tax rate is being seriously considered, a
number of misleading or false arguments against the increase typically
appear. The following list presents
actual arguments made by cigarette companies, or their lobbyists and allies, in
various states. Some were made publicly
to policymakers or the media, and others were made only behind closed doors. As
outlined below, however, none of these arguments holds water when confronted
with the actual, relevant facts.
I.
Cigarette
Company Myth: Cigarette tax increases are regressive and hurt poor people.
A. The cigarette companies have it backwards: it is the
harms from smoking that are regressive, with lower-income communities
already suffering disproportionately from smoking-caused disease, disability,
death, and costs (thanks in no small part to cigarette company marketing
tactics). Raising cigarette taxes, by
getting more lower-income smokers to quit and cutback, will reduce those
regressive harms and costs, not only helping lower-income smokers but reducing
harms and costs to their families.
B.
Raising
cigarette taxes helps lower-income communities the most because lower-income
smokers are more likely to quit because of tax increases than higher income
smokers. That means
that cigarette tax increases will reduce smoking-caused harms more sharply
among lower-income families and communities – and that lower-income smokers are
more likely than higher-income smokers to end up getting a big tax cut. Lower-income smokers who quit because of a
tax increase not only stop paying any cigarette taxes at all but also stop
spending any of the other amounts they previously paid for cigarettes, and
lower-income smokers who cutback can also reduce their overall expenditures on
cigarette taxes or cigarettes.
Calculating the cigarette tax savings and total cigarette expenditure
savings for a pack-a-day smoker in the state who quits (or a two-packs-a-day
smoker who cuts back to one pack) can be quite revealing, with typical savings
from reducing cigarette expenditures totaling considerably more than$1,000 per
year.
C.
Numerous polls show that there is strong support for
tobacco tax increases among lower-income communities. Nobody wants cheap cigarettes in their
neighborhoods. [See, e.g., the TFK
factsheet, Voters Across the Country Support Significant Increases in State
Tobacco Taxes, http://tobaccofreekids.org/research/factsheets/pdf/0167.pdf.
]
D.
Cigarette tax
increases can be used to avert cuts to programs that benefit low-income
communities or to fund new programs that will do so, including funding for
tobacco prevention and cessation assistance.
E.
By reducing
smoking rates, cigarette tax increases will reduce the large amounts low-income
and other state households are already paying in state and federal taxes to
cover smoking-caused government expenditures.
F.
See the
Campaign for Tobacco-Free Kids (TFK)
II.
Cigarette Company Myth: Cigarette tax increases unfairly target smokers
and make them shoulder the burden for statewide budget problems.
A. Total state income from cigarette taxes is currently far
less than conservative estimates of state smoking-caused costs. [For actual state-specific data
to show comparisons, see
B.
After any
state cigarette tax increase, the state cigarette tax per pack, will still be
far less than what the U.S. Centers for Disease Control & Prevention (CDC)
estimates is the state’s smoking-caused healthcare costs per pack (the national
average is $7.18 per pack). [See the
C.
To make the
tax increase exceedingly fair to smokers
(and better for public health, and even more popular among voters), the state
should allocate a portion of the new tax revenues to initiate or expand
programs to help adult and youth smokers quit (e.g.,
quit lines, public education, school-based programs, etc.). Better yet, the state should also use some
of the new revenues to fund expanded efforts to prevent more kids from
cigarette addiction. [And doing all that
won’t cost more than a few pennies per pack of the tax, while producing future
reductions in state smoking-caused costs that will reduce economic burdens on
all state residents, including smokers.]
III.
Cigarette Company Myth: The state is already getting tons of tobacco
money; seeking more is excessive.
A.
See IIA., above.
B.
While the
state also gets tobacco settlement payments, those are to reimburse the state
for its past and future costs caused by the cigarette companies illegal and
wrongful acts prior to the tobacco settlement (and are far less than the total
of those harms and costs).
[And those illegal and wrongful acts – marketing to kids, failing to
disclose known dangers and harms caused by their products, interfering with
scientific research and public awareness regarding product harms, etc. – have
been fully established by court rulings and in internal industry documents
disclosed in various lawsuits against the companies.]
IV.
Cigarette Company Myth: The state (or federal , state, and local
government) is already getting more per pack than the cigarette companies.
A. Every
state actually suffers a net loss for every pack sold within its borders but
the cigarette companies make a net profit on every pack sale. The cigarette companies
comparison between their alleged profits per pack against total state or
government revenues per pack is unfair and misleading. Company profits per pack equal what the
companies gain, free and clear, after paying for all their costs associated
with producing and marketing the cigarettes they sell. Similarly, the state’s “profit” (or loss) per
pack equals the state’s cigarette tax revenues minus the state’s
cigarette-caused costs. Doing the math
shows that every state has a per-pack loss.
[Subtract CDC state smoking costs per pack from state’s actual or
proposed tax per pack. See above for TFK
factsheets containing that data.]
According to the Tobacco International trade journal, in 2004 Philip Morris had an average profit in
the
B. It is not fair or reasonable to include tobacco
settlement payments when determining state revenues or profit/loss per
pack. See IIIB., above. But even if those payments are included, the
state is still running at a loss.
[Dividing current state settlement receipts by the number of packs sold
will provide the state’s per pack settlement revenue. See above for TFK factsheets
containing that data.] It is also
important to note that the cigarette companies are able to take a big “business
expense” tax deduction for all of their tobacco settlement payments, which
reduces their taxes by at least $1.0 to $1.5 billion per year (thereby
increasing their per-pack profits, as well).[1]
C. Similarly, it does not make sense to include state
sales tax revenues on cigarette sales since the sales tax applies to
virtually all products sold in the state and is neither tobacco specific nor
meant in any way shape or form to compensate the state for tobacco-caused
harms. But even if tobacco product sales
tax revenues are included, the state is still running at a loss.
D. Total
state tobacco revenues per pack sold in the state are almost always less than
the cigarette companies’ total revenues per pack. The major cigarette companies
currently receive more than $2.10 per pack in gross revenues. But each state currently receives only its
current cigarette tax per pack in gross revenues – and only two states have tax
rates of more than $2.10 per pack (RI at $2.46 & NJ at $2.40). But both of those states still have a net
loss per pack sold because of state smoking-caused costs -- while the big
cigarette companies profit from each and every sale.]
E. The RJ Reynolds cigarette company, which has made this
argument most aggressively, says that it has profits of only 10 cents per pack
or less, but Wall Street Analysts and other experts say the major companies
profits per pack are 28 to 46 cents per pack.[2]
F. These
analyses of cigarette company profits or revenues per pack do not even consider
the fact that the whole tobacco industry’s profits per pack are much larger
than just the profits of the cigarette companies. It is not only the cigarette manufacturers,
such as Philip Morris and Reynolds American, that gain revenues and profits
from cigarette sales but also cigarette distributors and retailers. Comparing state or government-wide cigarette
revenues or net losses against cigarette industry-wide revenues or profits show
that the cigarette industry, as a whole, is doing much, much better than the
states per each pack sold.
V.
Cigarette Company Myth: Cigarette tax increases do not provide a reliable
source of future state revenue.
A. After
an increase, state cigarette tax revenues sharply increase and then slowly
decline because of state smoking declines -- but those declines will be gradual
and completely predictable. There
will be no surprises and the state can easily adapt.
B.
State tobacco tax
revenues are more predictable and stable than state income tax or corporate tax
revenues, which can decline sharply because of unexpected economic
recessions. [State budget reports will
provide useful examples.]
C.
A state could
easily compensate for the slow and predictable tobacco tax revenue declines by
periodically increasing its tobacco tax rates, instituting an automatic
inflation adjustment to its tobacco tax rates, and/or implanting automatic rate
increases whenever revenues fall below an established floor. The inflation adjustment, for example, could
be based on the MSA inflation adjustment (i.e., an annual increase of 3% or the
actual rate of inflation for the prior year, whichever is highest).
D.
Along with the
small, gradual declines in cigarette tax revenue caused by smoking declines,
the state will also be accruing significant reductions to its smoking-caused
costs. Over time, these savings will
more than make up for any cigarette tax revenue reductions.
VI.
Cigarette Company Myth: Cigarette tax increases will promote cigarette
smuggling, black markets, and smoker tax avoidance, which will eliminate state
revenue gains.
A. Every single state that has
significantly increased its state cigarette tax rate has enjoyed substantial
increases in state revenue – despite the consumption declines prompted by the tax increase and
despite any related tax avoidance. The
increased new revenue the state receives on each pack sold in the state greatly
outweighs the revenue losses from fewer packs being sold. [See the TFK factsheet Raising State Tobacco
Taxes Always Increases State Revenues & Always Reduces Tobacco Use, http://tobaccofreekids.org/research/factsheets/pdf/0098.pdf.]
B. The
smuggling/tax avoidance problem is a lot smaller than the cigarette companies
and their allies say. [See the same TFK factsheet mentioned in
VI.A, above.]
C. There
are simple, often low-cost, steps the state can take to minimize any loss of
revenue from cigarette smuggling or smoker tax avoidance -- and state support for comprehensive
federal anti-smuggling and tobacco-internet legislation would further reduce
any such revenue losses. [See the TFK
factsheet outlining state-specific options for minimizing tax evasion and
smuggling at http://tobaccofreekids.org/research/factsheets/pdf/0274.pdf. For guidance on possible state legislation to
curtail Internet-based cigarette and other tobacco tax evasion, see the materials
at http://tobaccofreekids.org/research/factsheets/index.php?CategoryID=29.]
D. States
can take steps to maximize new cigarette tax revenues by minimizing
pre-increase hoarding and related revenue problems. First,
state should be sure to apply the cigarette tax increase to all cigarettes held
in wholesaler or retailer inventories on the effective date of the increases --
virtually all states and the federal government do this whenever they raise
their cigarette tax rates but some states (e.g.,
E. There
are very good models and formulas available for projecting state revenues from
proposed cigarette tax increases that take full account of possible increases
in tax evasion and smuggling. These models show that states will
still enjoy substantial additional new revenues from significant cigarette tax
increases – and states that use these conservative models can be assured that
there will be no “lower-than-expected” problems with future state cigarette tax
revenues following the increase. [For
example, TFK’s model and formulas for projecting state revenues from cigarette
tax increases is quite conservative.]
VII.
Cigarette Company Myth: Cigarette tax increases do not reduce youth
smoking (or any smoking).
A. It
is amazing that the cigarette companies’ lobbyists and allies continue to make
this argument with a straight face despite the absence of any facts to support
it. In fact, the
cigarette companies have repeatedly asserted and acknowledged, both publicly
and in internal company documents disclosed in tobacco lawsuits, that raising
cigarette prices through state tobacco tax increases or other means
significantly reduces smoking, especially among kids and lower-income
communities. That fact is also well established by scientific research and by
the actual experiences of states that have raised their tax. [See the TFK Factsheet Raising Cigarette Taxes Reduces
Smoking, Especially Among Kids (and the Cigarette Companies Know It), http://tobaccofreekids.org/research/factsheets/pdf/0146.pdf.]
B. The companies’ fallback argument doesn’t work, either. A related new cigarette company argument is
that tax evasion by current smokers after cigarette tax increases is now a much
bigger problem that previously and that cigarette tax increases therefore do
not produce the same smoking declines as they have in the past. It is important to note that this argument
acknowledges that cigarette tax increases have and still do prevent and reduce
smoking rates, but argues simply that the post-tax-increase smoking declines
will not be as large as in past years.
In addition, this cigarette company argument also ignores the fact that:
a) the declines are still substantial;
b) those smokers most likely to take steps to evade the higher cigarette
tax rate are the heaviest and most powerfully addicted smokers, who were and
are the least likely to quit and cutback anyway. Conversely, those smokers most likely to
quit or cutback after cigarette tax increases – such as youth smokers, those
already trying or planning to quit, and light or occasional smokers – are also
the least likely to take any extra steps (other than quitting or cutting back)
to try to evade the cigarette tax increase.
And any rise in smoker tax evasion would not have any significant impact
on the ongoing power of cigarette tax increases to prevent kids from taking up
smoking. [Also, see VI. C., above, on
ways that states can reduce cigarette tax evasion, which will not only increase the amount of new revenue
the state gets from its cigarette tax increase but also minimize any risk that
tax evasion will reduce the power of the increase to cut current smoking
levels.]
VIII.
Cigarette Company Myth: Cigarette tax increases will hurt the state’s
economy by reducing cigarette sales and related employment, retailer revenues,
etc.
A. Money
spent on cigarette sales will not disappear when cigarette sales decline, it
will simply shift to consumer expenditures on other products or to consumer
savings or investments.
In other words, smokers who quit or cutback will spend or use the money
they formerly spent on cigarettes in other ways – and those alternative uses
are likely to produce more jobs and more productive economic activity. For example, cigarette manufacturing and
distributing is very capital intensive and does not create a lot of jobs for
people; and shifts from spending on a consumable (especially one with such
large social costs) to saving or investing is always more economically
productive. In addition, most states are
exporting a large portion of its own consumers’ expenditures on cigarettes to
those tobacco states where cigarettes are manufactured and tobacco leaf is
grown – which only helps the tobacco states’ economies. Shifting consumer expenditures on cigarettes
to other products tends to keep the money in the state, where it will generate
new jobs and other beneficial economic activity.
- Economic studies have found that
even if smoking were entirely eliminated in the United States, the net
economic effect on each state would be positive (except in a few of the major tobacco states),
with more jobs created as well as other increases in productive economic
activity.[3] Even in those states with the highest
levels of tobacco farming and tobacco manufacturing, the economic
consequences from the elimination of all U.S. smoking would be minimal –
and the increasing diversification of those states’ economies in recent
years may have eliminated those net consequences altogether.
- A study of retailer gross revenues
by the State of
- State-specific economic impact
studies in
- The cigarette tax increase will
reduce direct public and private smoking-caused costs, which will further
strengthen and improve the state’s economy – especially since those savings will,
overall, be shifted to much more productive uses.
- CDC estimates that productivity
losses caused by smoking amount to more than $82 billion per year – and that total does not even include
business losses from cigarette breaks or from workers being less
productive when on the job because of smoking caused health problems.[6]
[CDC estimates of state productivity losses available from the
- Directing the new state government
revenues generated by the cigarette tax increase to reduce state budget
deficits or to fund economically productive programs or projects will
further strengthen and improve the state’s economy.
IX.
Cigarette Company Myth: Cigarette tax increases will hurt the state’s
tobacco farmers.
A. Even
eliminating all smoking in any particular state would have only a very minor
impact on the overall demand for American-grown tobacco leaf – and the state cigarette tax increases being considered will not
(unfortunately) even reduce smoking in the state by half. Smoking by
X.
Cigarette Company Myth: Cigarette tax increases will reduce the state’s
tobacco settlement payments.
A. There
is no automatic offset that reduces tobacco settlement payments to the state if
the state increases its cigarette taxes. [There was such an offset for certain federal
cigarette tax increases, but that provision expired in 2002.]
B. The
“volume adjustment” in the state tobacco settlement agreements reduces
settlement payments to the states based on reductions in the nationwide
(not state) cigarette sales of the major cigarette companies. The reduction in pack sales
prompted by the cigarette tax increase proposed in the state would have only a
miniscule impact on those nationwide sales, and an even smaller impact on the
state’s settlement payments.
C. See
the TFK factsheet Effect of State Tobacco-Tax Increases on MSA and Phase II
Payments to the States, http://tobaccofreekids.org/research/factsheets/pdf/0197.pdf.
XI.
Cigarette Company Myth: Cigarette tax increases will reduce state
revenues by eliminating or reducing state cigarette sales to smokers in other
states (e.g., it will reduce cross border sales, reduce sales to interstate
smugglers, eliminate state as source for internet sales).
A. This argument applies only to very low-tax
states or to states with cigarette tax rates significantly lower than
neighboring states. But even in regard
to those states, it fails.
B. States will enjoy substantially more state
revenues from increasing their state cigarette tax rate than they will lose
from any corresponding reduction to their sales to cigarette smugglers,
law-breaking internet sellers, or tax-avoiding shoppers from other states. In many cases the new state revenues from the
cigarette tax increase will not only exceed current state tax revenues from
sales to out-of-state buyers but also exceed all retailer profits from those
sales to out of state buyers.
C. States should not support the in-state sale
of cigarettes to illegal smugglers, internet sellers, or tax-avoiding shoppers
from other states. By raising their cigarette tax
rates, states can reduce or eliminate the illegal profit margins from these
illegal activities, thereby reducing these illegal activities. More specifically, in some cases terrorist
organizations have been raising revenues through cigarette smuggling from
low-tax to high-tax jurisdictions. By
raising their cigarette tax rates, low-tax states can not only increase their
own revenues but also help to stop such terrorist fundraising activities by
making it much less profitable.
XII.
Cigarette Company Myth: Cigarette tax increases will not save money
because smokers dying early reduces state costs.
A. The
average smoker actually has significantly higher total lifetime healthcare
costs than the average nonsmoker, even though the average smoker dies a lot
sooner than the average nonsmoker.[7]
B. See
the TFK factsheet Immorality and Inaccuracy of the Death Benefit Argument, http://tobaccofreekids.org/research/factsheets/pdf/0036.pdf.
XIII. Cigarette Company Myth: What’s
next, raising taxes on fatty foods? Raising cigarette tax is just the first
step in public health nazi’s plan to tax everything that is bad for you.
A. There
is absolutely no consumer product or category of consumer product other than
cigarettes and tobacco products that, when
used as directed, inevitably causes disease, disability, and death and
enormous social and economic costs.
B. There
is also no consumer product or category of consumer product other than
cigarettes and tobacco products that, as actually used by consumers, directly
causes as much disease, disability, and death and enormous social and economic
costs (as reflected in the fact that smoking kills many
more people each year than alcohol, illegal drugs, murder, suicide, accidents,
and AIDS, combined).
C. While obesity is, according to some estimates, now
responsible for an enormous number of deaths each year, that total is still
considerably lower than the smoking-caused death toll. In addition, the causes of
obesity are numerous and diverse. The
connection between fatty foods and obesity-related disease is nowhere near as
direct and powerful as the causal relationship between smoking and lung cancer
and numerous other diseases.
Campaign for Tobacco-Free Kids, February
9, 2005 / Eric
Lindblom
For additional information
on state cigarette taxes and the many benefits from
increasing them, see the
Campaign for Tobacco-Free Kids website at
http://tobaccofreekids.org/reports/prices &
http://tobaccofreekids.org/research/factsheets/index.php?CategoryID=18
Please send any comments, new response ideas, or
new cigarette company anti-tax arguments to:
Eric Lindblom
Campaign for
Tobacco-Free Kids
Phone : 202-296-5469
Fax: 202-296-5427