On Thursday night, I had the opportunity to go to the Governor's town hall forum in Grant County on the proposed cigarette tax increase.
The opening speaker talked about how we all have to "do our share" to get Kentucky through this crisis.
Governor Beshear's PowerPoint-based presentation showed basic percentage cuts in the budgets of most areas of state government. The Kentucky SEEK funding (the bulk of K-12 funding), Medicare and Medicaid were the primary areas where cuts were not made.
He plans to borrow over $140M from the rainy day fund. He expects the cigarette tax increase to raise $81M in Kentucky's 4th fiscal quarter of 2008, which ends in June 2009. (Kentucky's fiscal years end at the end of June, the following year).
He then intends to pay the rainy day fund back with the extra cigarette tax revenue the following 2 years. So all branches of government, minus primary and secondary education, take a cut, and only 27% of residents (those who smoke) are expected to pick up the majority of the tab. So much for everyone "doing their share."
The only place taxes are being raised are those on tobacco products (not just cigarettes, as clarified by a question given to the Governor by a Campaign for Liberty member).
Some of those who spoke at the event were simply anti-tobacco. A number of the comments centered around reducing tobacco use and "wishing the tax was even higher". Others spoke of taxing sodas and certain types of food. The puritans are everywhere, and they know how to live better than you. And they'll tax you into compliance.
I had the opportunity to ask the very first question of the Governor. My question was worded in a way to find the true motives of the Governor. I asked (paraphrased) why the cigarette tax, and not any other tax that might be applied universally to all citizens.
Now, I'm not for increasing taxes on anything. But the purpose of my question was to establish intent.
After hemming and hawing around, Governor Beshear responded that indeed, the cigarette tax revenues would decline, over time, though he said it would be "many years" before that happened. He admitted that the goal was indeed to reduce smoking in Kentucky to cut long-term health care costs.
At least he was honest about it. One thing I do like about Beshear is that he doesn't lie. Sometimes, he does spin and tries to sugar-coat an issue, but he doesn't lie.
The problem is, this plan won't work.
Let's look at some numbers;
Less than 5 years ago, the cigarette tax was $0.03/pack. The tax was raised from $0.03/pack to $0.30/pack two or three years ago. That itself was a 900% increase in the cigarette tax.
If Beshear's proposed tax increase comes to pass, cigarette taxes will have increased by 3233.33% in less than 4 years.
If there were a 3233.33% increase in the sales tax, for instance, our current 6% sales tax would jump to 200% sales tax. You'd pay $3.00 for every dollar of "cost". A $1 candy bar would cost you $3.
Now admittedly, perhaps the tax was very low in the past, when the tax was a mere $0.03/pack. However, raising it to a full $1.00/pack makes our taxes (and therefore, prices) higher than almost every surrounding state (Missouri, Illinois, Indiana, West Virginia, Virginia, and Tennessee), with Ohio as the only exception.
Tax rates per pack of cigarettes for surrounding states:
- Missouri: $0.17
- Illinois: $0.98
- Indiana: $0.995
- Ohio: $1.25
- West Virginia: $0.55
- Virginia: $0.30
- Tennessee: $0.62
source: http://www.taxadmin.org/fta/rate/cigarett.html
However, another key factor is Fire Safe Cigarettes (FSCs). Those who smoke know about FSCs. While there's debate on exactly how it's accomplished, the FSCs themselves taste differently, and leave a metallic after-taste. As a smoker myself, the only reason I still buy Kentucky cigarettes is the significant price differential between Ohio and Kentucky.
Status of Fire Safe Cigarette legislation in surrounding states:
- Missouri: No
- Illinois: Yes
- Indiana: July 2009
- Ohio: No
- West Virginia: No
- Virginia: January 2010
- Tennessee: January 2010
So those near the Missouri, Virginia, and Tennessee border would, without a doubt, buy cigarettes outside of Kentucky.
Around the Illinois and Indiana borders, we may lose some who currently come to Kentucky today for the lower prices.
Those near the West Virginia border would, for sure, go to West Virginia. This is particularly bad news for the city of Ashland, which is already in a world of hurt, due to Racinos in West Virginia and a smoking ban in Ashland.
Even Ohio stands to gain cigarette tax revenue as a result of Besher's plan. They are without an FSC law, and even a quarter more expensive ($3.25/pack versus $3.50/pack) is worth the non-FSC cigarette.
This plan to increase revenue is going to backfire. Only the center of the state will be forced to buy Fire Safe Cigarettes at a higher price. Everyone else will go outside the state. With exception to Lexington and Elizabethtown, the main population centers in the state are on the border of other states.
Government using taxes to influence how people choose to live their lives -- also known as social engineering -- is plainly wrong. People should choose their own way, as long as they don't force others to live that way, without being punished through sin taxes.
Besides, I buy my cigarettes in Kentucky by the carton, before I go on a road trip. What makes Governor Beshear think that I won't buy my cigarettes by the carton in Ohio if this tax increase goes through? Road trip to Tennessee, anyone?
Ken Moellman
Chair, LPKY