A legislative-requested study by West Virginia University economists of a proposed increase of the state’s cigarette excise tax suggests the tax – which Thursday was defeated in a House committee – would raise tens of millions to help fill the expected $350 million gap in the state budget.
The Joint Select Committee on Tax Reform of the West Virginia Legislature requested that the Bureau of Business and Economic Research in WVU’s College of Business and Economics study the likely revenue effect of an increase in the tax.
BBER Director John Deskins said his team of economists looked at 80 separate cigarette excise tax increases that occurred across the U.S. since 2000 and concluded that, even with anticipated decreases in cross-border cigarette sales and a loss in sales due to the tax increase in general, state revenue would still grow by several tens of millions of dollars.
West Virginia’s Senate passed a bill that would increase the tax by $1 per pack, more than twice the 45-cent increase proposed by Gov. Earl Ray Tomblin. However the House Finance Committee defeated the bill on Thursday, and Chairman Eric Nelson (R-Kanawha) declared it dead for this session.
“Aside from the cross-border shopping issue and to the extent we can reduce smoking by imposing taxes, this is one of the least bad ways to tax,” Deskins said. “We estimate an increase of the upper $60 million range with an increase of 45 cents per pack and an increase in revenues that could go as high as $135 million with an increase of $1 per pack.”
For the purposes of comparison, the study added that an increase of 75 cents per pack could result in an additional $105 million in excise tax collections. The study also looked at a phase-in option for any cigarette tax increase.
“Rather than raise the cigarette tax rate per pack by $1 at a single point in time, any hypothetical tax rate hike could take place over a period of two to four years. Phasing in the rate hike over time could mitigate the potential for revenue losses in the transition year from a lower rate to a higher rate,” the study said.
West Virginia’s current cigarette excise tax is 55 cents, lower than nearly all of its neighboring states. Virginia’s tax is 30 cents, while Kentucky is at 60 cents. There is a dramatic jump in Pennsylvania and Ohio where the tax is $1.60, $2 in Maryland and $2.50 in D.C.
“The way in which changes in cigarette excise tax rates affect cigarette purchases in a state is multifaceted,” the study said. “First, unsurprisingly, individuals typically alter their cigarette consumption in response to tax-induced price changes. Second, it is almost certain that cross-border shopping behavior responds to changes in tax policy.”
The WVU study indicated that West Virginia was among the last states in the country to create excise taxes for other tobacco products, such as snuff and chewing tobacco, in 2002. Sales of those products have increased from $2.2 million in 2002 to $7.1 million in 2015.
“Taxes were set at the same rates for all other tobacco products at 7 percent of the wholesale price,” the study showed. “For comparison, these rates are in most cases lower than the neighboring states. For instance, Kentucky has a 19 cent tax per unit of dry snuff, while Maryland and Ohio have a 15 and 17 percent tax on the wholesale price, respectively, and Virginia has a tax of 10 percent of the manufacturer’s price. For chewing and smoking tobacco, Kentucky, Maryland, and Ohio have a 15 percent, 15 percent, and 17 percent tax of the wholesale price, respectively, while Virginia has a 10 percent tax on the manufacturer’s price.”
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CONTACT: Patrick Gregg; College of Business and Economics
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