LB438 – Increase cigarette and tobacco taxes as prescribed and provide for the distribution of funds

Good afternoon, Chairman Smith and members of the Revenue Committee.  My name is Nicole Fox, and I am the Director of Government Relations for the Platte Institute for Economic Research.  I am here today to testify in opposition to LB 438.
 

While finding funding sources for behavioral health is commendable, using an unreliable revenue source like a cigarette tax to draw more federal grants is not a wise fiscal decision for the state of Nebraska.  Historically, federal grants for programs mentioned in the bill are adjusted annually and sometimes stopped or significantly reduced with little or no notice to the state.  This makes it even more risky to fund these operations with a revenue source that has declined on average of 2.1 percent per year over the last decade.  A higher tax brings an expectation of even lower sales, meaning the state can expect to see more decline if this additional tax were levied. 
 

During this same time period, the state’s demand for Health and Human Services related programs has grown significantly.  If Nebraska is to rely on this tax to fund necessary services for the state’s most vulnerable populations, it will create long-term funding shortfalls that will have to be paid for with other budget revenues.  In recent years, 91 percent of cigarette excise tax increases across 32 states have missed their revenue projections, some by as much as 180 percent.  Many national organizations also agree with this, even the National Conference of State Legislatures specifically states “Cigarette taxes are not a stable source of revenue.”
 

From a policy standpoint, this regressive tax would affect lower-income adults the most. According to the Centers for Disease Control and Prevention, 31.6 percent of adults in Nebraska who earn less than $15,000 per year are smokers. Raising this tax will unfairly burden these low-income earners.

 

Research has found that higher tobacco taxes reduce usage by an insignificant amount and are more likely to increase smuggling, creating an illegal tobacco market, without necessarily improving health outcomes.

 

A 2014 study by the National Bureau of Economic Research found that current smokers have demonstrated a strong preference for the habit, that is largely undeterred by tax rates. The study also found that if the tax was increased by 100 percent, it would decrease adult smoking by only five percent. Adult smokers will go out of their way to avoid paying higher taxes by purchasing them from bordering states, or through the black market – not by reducing or stopping their smoking habit.

 

Under current law, Nebraska is ranked 40th in the nation, with Missouri and Wyoming the only neighboring states with lower rates. If this bill is enacted, the 234 percent increase will give Nebraska the 12th highest rate in the country and the highest amongst its neighbors.

 

LB 438 could also unintentionally trigger an illegal market for tobacco. Economists at the Mackinac Center for Public Policy in Michigan have created a statistical model to estimate the degree to which cigarette smuggling occurs in all fifty states. According to these economists, “Nebraska’s 2015 smuggling rate was a puny 1.14 percent of total cigarette consumption in the state. But if the proposed bill, LB 438, is adopted that rate will rocket to 30 percent of the total market, putting Nebraska 6th overall behind Minnesota.”

 

In addition to smuggling concerns, the increased tax rate would also mean that Nebraska would see a decline in the sale of legally taxed cigarettes, but not on the assumption that fewer people are smoking. The Journal of Health Economics found that up to 85 percent of the change in legal sales after a tax increase is due to tax avoidance and evasion, not by quitting smoking.  This was proven after the 2002 cigarette tax increase when Nebraska lost $121 million in cigarette excise tax revenue to neighboring states and the state budget revenue fell 20 percent short of projections.  Ultimately, variations in state cigarette taxes often result in smuggling, legal border crossings to low tax jurisdictions, and internet purchasing.

 

After a review of the evidence and sound tax policy, an increase in the cigarette tax would do more harm than good in Nebraska. Thank you for the opportunity to testify before you today. I am happy to answer any questions.

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