LOGIN MPPI NOT A MEMBER? REGISTER

FOR PRESS MPPI CONTACT US MPPI SUPPORT

Myths and Facts about Tobacco Taxes

Economic & Fiscal Policy

SPECIAL REPORT

FEBRUARY 14, 2012 Bookmark and Share

In Governor O’Malley’s Fiscal Year 2013 budget proposal, he recommends raising the tax on “other tobacco products” from its current rate of 15% of wholesale price to 70% of wholesale price. Advocates for this tax say it is necessary to stop teenagers from smoking cigars. These advocates claim that teenagers switched from smoking cigarettes to smoking cigars because of the recent increase in the cigarette tax, and now it’s time to increase the tax on cigars.

While this narrative may make for good press conferences, it is based on faulty assumptions both about youth cigar usage and on how this tax will affect the sale of the small cigars preferred by youth.

Myth: Maryland is experiencing a big rise in underage cigar use.

Fact: There has been a small rise in underage cigar use since 2000, but a drop since 2008.

According to the Maryland Department of Health and Mental Hygiene, 8.8% of underage Maryland middle and high school students used cigars in 2000. That number rose slightly to 9.5% in 2010. So it is true that in the last two years there was an increase in the percentage of underage Marylanders who use cigars. However, in 2008, 10.6% of underage Marylanders used cigars.[1]

Maryland has seen a slight increase in the percentage of underage youth who use cigars since 2000, but the share of youth using cigars peaked in 2008 and is currently declining. It is unclear what is causing this decline, but it is happening without any increase in the cigar tax.

Myth: The increases in Maryland’s cigarette tax have dramatically cut teenage cigarette use.

Fact: Teen cigarette use has declined substantially since 2000, but it actually increased from 2006 to 2008, a time period covering the 2007 cigarette tax increase.

Over the past decade, Maryland has had two increases in its cigarette tax: one that took effect on June 1, 2002, and one that took effect on January 1, 2008. During this decade, the use of cigarettes by underage Maryland middle and high school students has also declined, but there seems to be no clear connection between the tax hikes and this decline.

Between 2000 and 2002, the percentage of underage youth in Maryland who used cigarettes declined from 15.7% to 12.5%. After the tax hike of 2002 took effect, cigarette usage declined further to 10% in 2006. However, between 2006 and 2008, a time period that included another cigarette tax increase, cigarette use also increased, from 10% to 10.2%. Between 2008 and 2010, cigarette usage once again began to decline, ending the decade at 9.6%.[2]

Given the multiple factors at play, it is plausible that the increased cost of cigarettes due to the cigarette tax hike did play some role in reducing underage cigarette use. However, this relationship is not a straightforward one. Underage cigarette use was declining prior to a cigarette tax hike, it declined after a cigarette tax hike, and it increased after a cigarette tax hike. It is a stretch to claim that cigarette tax increases are primarily or even largely responsible for the decline in underage cigarette use.

Myth: The increases in Maryland’s cigarette tax are responsible for teenage cigar usage increasing.

Fact: There doesn’t seem to be any relationship between teen cigar use and cigarette tax increases.

If the relationship between Maryland’s cigarette tax increases and teen cigarette use is tenuous, at best, then the relationship between these tax hikes and cigar usage is nonexistent.

As noted above, there were two cigarette tax increases over the past decade, one in 2002 and one in 2008. Underage cigar usage between 2000 and 2002 declined from 8.8% of the population to 7.5%. Between 2002 and 2006, it further declined from 7.5% to 6.5%. Between 2006 and 2008, however, the percentage of underage middle and high school students using cigars increased dramatically, to 10.6%. Over the next two years, this usage declined, ending at 9.6% in 2010.[3]

If the assertion that higher cigarette taxes lead to underage smokers shifting their tobacco usage to cigars, then one would expect a spike in cigar usage after 2002. That did not happen. Instead, underage cigar usage declined. Youth cigar usage did increase significantly during the time period of the next cigarette tax hike. However, if this increase was caused by the cigarette tax increase, then why did the percentage of youth who smoke cigars decline after its peak in 2008?

Looking at the numbers, there is no evidence that the two cigarette tax hikes had any noticeable effect on youth cigar usage.

Myth: This tax is targeted at raising the price of the cheap cigars favored by teenagers.

Fact: This tax is designed to affect high-priced premium cigars far more than cheap cigars.

There are two kinds of taxes that can be imposed on products: a per-unit tax and a value-based tax. In a per-unit tax, an item is taxed at the same rate regardless of its cost. The gasoline tax is this kind of tax, and whether you buy regular gasoline or premium gasoline, you pay the same tax per gallon. With a value-based tax, however, the amount you pay in taxes goes up with the price of the item. Sales taxes are a good example of this type of tax, where you pay 60 cents in tax on a $10 shirt but $6 in tax on a $100 shirt.

Per-unit taxes have a greater impact on lower-priced items than they do expensive items. If you are paying the same tax amount on a low-cost item as on a high-cost item, it disproportionately raises the price of the low-cost item. A value-based tax, however, is just the opposite: low-cost items are better off, since the tax amount on a higher-cost item is greater than the tax amount on a lower-cost item.

The proposed tax hike on other tobacco products is a value-based tax. As such, it will affect the lower-priced cigars less than it will affect higher-priced premium cigars. This is an important point because underage teenagers buy the small, cheap cigars, not premium, expensive cigars. They are spending 75 cents or $1 on the small cigars sold at convenience stores, not $5 or $10 on the high-quality cigars sold at tobacco shops and premium cigar stores.

To see the effect of the proposed value-based tax, consider the example of two cigars: one with a wholesale cost of 40 cents (likely to be the type of small cigar sold behind the counter of gas stations and convenience stores) and one with a wholesale cost of $4.00 (likely to be found at premium cigar shops). A 70% tax on a cigar that has a wholesale cost of 40 cents is 28 cents. A 70% tax on a cigar with a wholesale cost of $4.00 is $2.80.

Some premium cigars have far higher wholesale costs than $4.00 (one very premium cigar has a wholesale price over $50, for instance). As the wholesale cost of cigars goes up, the tax amount will also increase. That means this tax will disproportionately affect premium cigars, not small, cheap cigars.

Myth: This tax won’t have much of an effect on premium cigar shops.

Fact: This tax will have a large adverse effect on premium cigar shops and make it much more attractive for their customers to shop online or out-of-state.

If you are a premium cigar customer, would you continue to buy cigars in Maryland if this new tax meant you had to pay anywhere from an additional $2 to an additional $13 per cigar? It seems unlikely, given the ease of ordering premium cigars online. Maryland does not stop consumers from buying cigars from out-of-state (or out-of-country) Internet retailers, retailers that are not going to collect the state's tax. If this new tax hike is implemented, the cost savings of buying online would be significant.

A 70% tax on the wholesale price of cigars will also mean that Maryland would have far higher taxes on cigars than do its neighboring states.

State

Tax Amount[4]

Maryland

70% of wholesale price (proposed)

Virginia

10% of manufacture price

Delaware

15% of wholesale price

West Virginia

7% of wholesale price

Pennsylvania

No tax on large cigars; little cigars taxed the same as cigarettes

District of Columbia

12% of retail price, but tax doesn’t apply to cigars costing over $2

For the many Marylanders who work in other states or the District or who live near the border, buying cigars in these areas becomes far more attractive under Governor O’Malley’s tax proposal.

For a teenager looking to buy a small cigar from the local convenience store, an additional 30 or 40 cents in tax may be a slight discouragement. For a cigar aficionado, even an additional $2 per cigar could add $50 to the price of a box of cigars. Obviously, as the quality and price of cigars increases, the burden of this additional tax will make premium cigar buyers look elsewhere.

Another problem the governor’s tax proposal poses for premium cigar shops is the provision in the budget legislation that imposes this tax increase on any cigars or other tobacco products possessed by merchants on July 1, 2012 (the date the tax increase would go into effect). Cigar retailers with significant stocks of premium cigars bought before the tax hike went into effect would be faced with a significant tax bill under this provision.

The end result of this tax will not be to end or even significantly curtail the sale of small cigars in Maryland, but it will likely end the sale of premium cigars in Maryland.



 [1] Maryland Department of Health and Mental Hygiene, “Monitoring Changing Tobacco Use Behaviors 2000-2010: Legislative Report,” p. 36. http://fha.maryland.gov/pdf/ohpetup/HG13-1004d-FHA-BiennialTobaccoReport.pdf

 [2] Ibid

 [3] Ibid

 [4] Campaign for Tobacco Free Kids, “State Excise Tax Rates for Non-Cigarette Tobacco Products,” http://www.tobaccofreekids.org/research/factsheets/pdf/0169.pdf