Impact of Increased Smoking Taxes on Arkansas

Arkansas seems to be setting on a two edge sword when it comes to relying on cigarette smokers to be the source of more revenue. On one hand, last Tuesday, Governor Beebe said that he will ask state lawmakers to increase Arkansas’ cigarette tax to raise money for a trauma system and other health-related needs. He identified that he will seek 50 cents or higher. The tax is now 59 cents per pack. Beebe said it would cost $28 million to fund three Level 1 trauma centers, the facilities in the system that would provide the highest level of care. He detailed that Revenue from a cigarette tax hike would go into the General Revenue Fund, and money not used for the trauma system could go to other health-related programs. Gov. Beebe said, “If a trauma system costs $28 million and $71 million is what’s raised, then obviously it’s a lot more than a trauma system. It’s a health care program.”

Before moving to the next point, Who is promoting cigarette sales? Arkansas has introduced numerous programs in the public school system to reduce the the use of cigarettes and thus the sale of cigarettes in hopes of eliminating future health risk problems. Is it now patriotic to smoke and thaus help pay more taxes to fund not only one but three trauma centers and unnamed medical programs? Does cigarette smoking cause medical traumas? Consider what happens when the number of smokers declines to the point that there is not enough revenue to fund all the various medical programs that may come into existence due to Gov. Beebe's anticipate surplus from this cigarette tax increase. History shows that once programs are in place, they tend to stay in place. But, then the programs would need be funded through other forms of taxation not just on smokers but on everyone.

While we think over Beebe's increased "sin tax" on smoking, consider the other side of "cigarette tax" sword hanging over Arkansas. Remember those big Tobacco settlements and the Master Settlement Agreement (MSA) from which Arkansas benefited and was to benefit in the future. Remember when we didn't use the initial settlement money for funding medical programs at universities (but no trauma centers) and lots of non-medical programs. Well, if a proposed $0.61 federal excise tax increase is implemented, the total annual MSA payments Arkansas payments to Arkansas could decline by $4.06 to $4.57 million per year.

One might call this the hypocrisy side of SCHIP. With increased benefits under SCHIPS comes the resultant increased cigarette tax. The following report shows just how much this tax would end up costing the state. Yes, it was prepared by Altria Client Services Inc. for the Philip Morris USA Inc. But the fact remains that an increased federal cigarette excise tax could impact the revenues that Arkansas receives from its share of the Master Settlement Agreement (MSA) and its state excise tax revenues. Below is a "to the point" footnoted report for your review. And, smokers, we may not love your smoke, but Democrats love the taxes you can pay. So "light 'em up," while you can afford it.

Arkansas’ Tobacco Settlement Payments
Under the Tobacco Settlement Agreements,¹ the amount paid by participating manufacturers is adjusted annually based on the volume of their shipments. The proposed tax increase, with its potential impact on tax-paid cigarette sales, could therefore cause Arkansas’ settlement payments to decline. Arkansas is entitled to 0.83% of the annual MSA payments made to all participating states. If a $0.61 federal excise tax increase is implemented, the total annual MSA payments could fall by an estimated $522 million to $587 million. ² The payment to Arkansas could therefore decline by $4.06 to $4.57 million per year. Arkansas has securitized the first $5 million of its annual payments through 2046.³ Outside of this securitized mount, which would not be affected by a decline in MSA payments,the state could lose between $4.06 and $4.57 million per year.

Arkansas’ Excise Tax Revenues
In addition, the reduction in tax-paid cigarette sales that is expected to follow a federal cigarette tax increase of this magnitude would negatively impact the state's excise tax revenues. Arkansas currently collects $0.59 per pack for every tax-paid cigarette sale in the state. If the proposed $0.61 federal excise tax increase is implemented, the state could lose between $10.01 and $11.27 million per year in state excise tax revenues.⁴
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¹ Tobacco Settlement Agreements include the Master Settlement Agreement ("MSA") and separate agreements with Florida, Minnesota, Mississippi, and Texas. All of the tobacco settlement agreements adjust their payments for changes in domestic volume. The MSA payments also account for volume changes in Puerto Rico, and roll-your-own product.
² These figures are based on an estimated reduction in tax-paid cigarette sales following the proposed $0.61 per pack federal excise tax increase. Totals may not add due to rounding. The estimates of cigarette price elasticity that are used in this paper are 10 years old and estimated the impact of price increases on consumer demand for cigarettes, not the impact of tax increases on tax-paid cigarette sales. The impact of cigarette excise tax increases on tax-paid cigarette sales has been the subject of a number of recent analyses. See: Cigarette Purchasing Patterns Among New York Smokers: Implications for Health, Price, and Revenue, NEW YORK STATE DEPARTMENT OF HEALTH, (March 2006); Michigan's Cigarette and Tobacco Taxes 2005 Statistical Update, MICHIGAN DEPARTMENT OF TREASURY, (July 2006); Illinois' Cigarette Tax, Tobacco Products Tax, and Tobacco Settlement Update, ILLINOIS COMMISSION ON GOVERNMENT FORECASTING AND ACCOUNTABILITY, (July 2006). Calculations are based on elasticity assumptions forwarded by the U.S. Department of the Treasury and the Congressional Budget Office ("CBO") in connection with Congressional hearings in 1998. Testimony by Assistant Secretary for Financial Markets Gary Gensler before the Senate Democratic Task Force on Tobacco, Treasury News, (May 13, 1998); Proposed Tobacco Settlement Issues From a Federal Perspective, CONGRESSIONAL BUDGET OFFICE, (April 1998). These elasticity estimates are based on testimony given in 1998, and reflect a general estimate of elasticity at that time, when prices for cigarettes were lower. The actual elasticity for a $0.61 federal tax increase could be different today. Philip Morris USA does not necessarily agree with, or endorse, the assumptions contained in this model. According to the Department of Agriculture, estimates of the price elasticity of demand for cigarettes range from -0.28 to -0.80, with most clustering between -0.40 and -0.75. Gale, H. Fredrick Jr. et. al., Tobacco and the Economy: Farms, Jobs and Communities, US DEPARTMENT OF AGRICULTURE, Agricultural Economic Report No. 789, (November, 2002). It is assumed that all manufacturers pass through the proposed tax increase and that the trade maintains its margins. The price increases in this analysis are for demonstration and comparison purposes only and do not necessarily reflect the actual price increases that may be passed on by either Philip Morris USA or any other tobacco company. In the absence of any mandatory price pass-through, each manufacturer would need to determine how much of the increased tax it will pass on to adult smokers. The price change also includes the maintenance of a trade margin of 17.2% and sales taxes. This margin is derived from: Thomas Capehart, The Changing Tobacco User's Dollar, US DEPARTMENT OF AGRICULTURE, TBS-257-01, (October 2004). Data is based on a weighted average price from Bill Orzechowski and Rob Walker, The Tax Burden on Tobacco, Vol. 42, (February 2008), funded by Philip Morris USA and other tobacco companies, and proprietary nationwide volume data gathered by PricewaterhouseCoopers in their capacity as auditor for the MSA. An adjustment to payments for the growth of non-participating manufacturers’ sales is not included in these figures. Market share, volume adjustment and inflation figures used to estimate the MSA payments are from: Independent Auditor's Notice of Preliminary Calculations for the Tobacco Litigation Master Settlement Agreement Subsection IX(c)(1) Account Payments Due April 15, 2007, Notice ID: 0211. Using the Treasury's -0.45 estimate of the price elasticity of demand, nationwide sales would fall by about 1,467 million packs. Under the CBO's -0.40 elasticity the national decline would be 1,304 million packs. Using volume data for the year 2007, and based on the Treasury's elasticity assumptions, the volume adjustment provisions in the tobacco settlement agreements would have led to a $587 million reduction in the total annual MSA payments, and a $4.57 million reduction in Arkansas’ annual payment. Note that the sum of all the payment reductions to the 46 MSA states will add up to 98.8% the total MSA payment reduction. The 1.2% difference relates to the Smokeless Tobacco Master Settlement Agreement.
³ Securitization information is based upon research performed by Hunton & Williams LLP, funded by Altria Corporate Services, June 2007.
⁴ Following the proposed $0.61 FET increase, Arkansas’ tax-paid cigarette sales could fall by 19.09 million packs. Arkansas currently collects $0.59 per pack in excise taxes, according to Bill Orzechowski and Rob Walker, The Tax Burden on Tobacco, vol. 42, (February 2008); funded by Philip Morris USA and other tobacco companies. This reduction in tax-paid sales could result in a loss of $11.27 million in state excise tax revenues.
ARRA Editor's End Note: We do not endorse smoking, nor do we endorse relying on smoking taxes to fund needed services. We would prefer that politicans and elected officials equally follow the same criteria asked of smokers, "butt out."

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