Why a Whopping Increase in Missouri’s Cigarette Tax Is a Bad Idea

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.