|Why a Whopping Increase in Missouri's Cigarette Tax Is a Bad Idea|
|By Amy Lutz|
|Wednesday, April 25, 2012|
While growing up in the small border town of Atchison, Kan., my father, uncles, and family friends made frequent trips over the Amelia Earhart Bridge to a small convenience store in Buchanan County, Mo. They usually returned with a full gas tank and small quantities of alcohol or cigarettes. I was too young to understand what prompted these excursions. Now I know. My father and others took advantage of Missouri’s low excise tax rates on gas, alcohol, and cigarettes. As these trips continued, sales and tax revenue were redistributed from Kansas to Missouri. While the convenience store in Missouri remained busy, the Shell station near the bridge in Atchison was often empty.
Missouri benefited at Kansas’ expense as a direct result of maintaining a lower tax rate in a competitive marketplace. In 2009, the QuikTrip on Southwest Blvd. in Kansas City, Kan., moved its location 100 feet into Missouri to take advantage of the lower excise taxes. However, the situation that prompted this move may be about to change.
Last fall, the Missouri Secretary of State gave approval to a coalition of Missourians, led by the American Cancer Society, to circulate a petition proposing an increase in the cigarette tax from 17 cents to 90 cents per pack, a whopping 429 percent increase. If passed, this proposal will stop the heavy cross-over traffic of people coming to Missouri from other states to buy cigarettes at a bargain price. In fact, business likely will shift in the opposite direction - out of Missouri into other states. Kansas’s 79-cent cigarette tax would certainly serve as an appealing alternative to Missouri’s potential 90-cent tax. Under the proposed increase, those who purchase cigarettes in Missouri would pay $2.20 more per carton than they would if they purchase cigarettes in Kansas.
While raising excise taxes might appear to be a simple way to increase revenue, it can backfire and may even cause a loss in net cigarette sales. Missouri’s two largest metropolitan areas, Saint Louis and Kansas City, border states with much higher cigarette taxes, prompting residents of neighboring Illinois and Kansas to make their purchases here. Missouri’s 17-cent tax is certainly attractive to residents of Illinois, where the tax rate is 98 cents, and Kansas, where the rate is 79 cents. Missouri benefits when residents of other states who come to Missouri for work, sporting events, etc., voluntarily make such purchases here.
Missouri Attorney General Chris Koster, a proponent of raising Missouri’s cigarette tax, claimed in the Kansas City Star that a fivefold increase in the state’s cigarette tax would lift revenue by a commensurate amount – from $90 million a year to close to $500 million. But Koster’s figures do not account for the major decrease in sales likely to occur should the tax hike become a reality. It is silly to think that cigarette sales will remain the same if Missouri smokers are required to spend $14.60 more per carton of cigarettes. Remember, when you tax something, sales will decrease. Increasing a cigarette tax might result in less smoking, but it will also drive down purchases of cigarettes.
Patrick Fleenor, former senior economist at the Tax Foundation, provides a telling example: When Michigan increased its cigarette tax rate from $2.50 to $7.50 per carton (25 cents to 75 cents per pack), sales decreased 26.7 percent. During the same period, cigarette sales greatly increased in Indiana and other neighboring states with lower cigarette tax rates. Should Missouri follow in the footsteps of Michigan, convenience stores in Atchison, Kan., are likely to become much more profitable and Missouri will experience a loss of cigarette revenue because fewer cigarette will be sold on the eastern side of the border.
Amy Lutz is an intern at the Show-Me Institute, which promotes market solutions for Missouri public policy.