Washington state has steadily raised its cigarette taxes in the last 20 years as a means to both curb smoking and raise revenue.
At the same time, though, something else has gone up: The rate at which people evade the tax by buying cigarettes out of state or online.
Nearly one-third of Washington’s potential cigarette tax revenues were lost to smuggling or tax evasion in the 2013 fiscal year, according to estimates by the state Department of Revenue.
The 2013 smuggling rate was nearly three times what it was in 1993, when state taxes on cigarettes were only 34 cents a pack. And that’s after accounting for the decline in overall consumption of cigarettes statewide and excluding the amount of cigarette tax revenues legally collected by tribes under compacts they’ve signed with the state.
Legislative leaders say increasing the cigarette tax further, as Democratic Gov. Jay Inslee has proposed, will likely cause the rate of tax evasion to go up even more.
“There is a taxing curve, where at some point the tax is so high that people start going to other places. And that’s why smuggling is a problem,” said Sen. Andy Hill, R-Redmond, who is the budget writer in the Senate.
Right now, cigarettes in Washington state are taxed at a per-pack rate of $3.025, which is the sixth-highest rate in the nation.
Combined with federal tobacco taxes, that made the average price of a pack of cigarettes in Washington $7.69 in 2013, according to a report commissioned by the Federation of Tax Administrators, a national group representing state tax agency officials.
Inslee has proposed increasing the per-pack tax on cigarettes by 50 cents to $3.525. If the tax increase happened today, Washington would have the second-highest state cigarette tax in the nation, following New York, which has a state cigarette excise tax of $4.35.
TAX COULD CUT SMOKING RATES, HEALTH COSTS
Jason McGill, the governor’s policy adviser for health issues, said Inslee’s office is aware that increasing the state’s cigarette tax may cause smuggling to increase.
But McGill said there’s a larger goal the governor is trying to address: Keeping kids from picking up smoking.
An analysis by the Washington State Institute for Public Policy last year found that a 10 percent increase in cigarette prices reduced youth smoking rates by 3.5 percent. The same price increase caused only a 1.3 percent reduction in smoking among adults, the analysis found.
“There is pretty strong evidence that increasing the tax does cut use – we have already seen that,” McGill said. “If you can affect that early population who are more price-sensitive, and you can stop them from smoking in the first place, that’s the key demographic.”
Backers of Inslee’s cigarette tax say it’s not just about making money, but also about saving some. By reducing rates of smoking, Inslee’s tax is also projected to save the state and individuals money on health-care costs over time, McGill said.
The governor’s office estimates that Inslee’s proposed 50-cent per pack increase would save the state $756,000 on public and private health care costs during its first year. Those savings are projected to rise to $9.7 million in 2021.
State Rep. Reuven Carlyle, a Seattle Democrat who chairs the House Finance Committee, said long-term savings on health care costs are where “the real money” is when it comes to proposed cigarette tax increases.
“Society subsidizes the tobacco industry,” Carlyle said. “We get stuck with the bill, especially at the hospitals. Taxes on cigarettes are just a way to reduce that subsidy.”
Those kind of savings, though, may not prove very helpful when writing a new-two year budget, said Hill, the Senate budget writer.
“Part of the problem is those are long-term savings, so they don’t accrue to the budget immediately,” Hill said.
Even the revenue that would be raised directly by Inslee’s proposed cigarette tax wouldn’t make much of a dent in the state’s current budget problem. In the 2015-17 budget, lawmakers are looking to add at least $1 billion to public schools to comply with a court order to increase education funding, as well as figure out how to pay $2 billion for a class-size initiative voters approved last fall.
The governor’s proposal to increase cigarette taxes by 50 cents a pack would net the state $37.8 million in new revenue in the next two years, according to his budget office.
LAWMAKERS HAVE OTHER IDEAS
State Rep. Ross Hunter, the House’s budget writer, said he is not necessarily interested in using that money to help balance the budget, but he is considering legislation that would dedicate the new cigarette tax revenues to cancer research. A bill sponsored by Sen. Cyrus Habib, D-Kirkland, would use the proceeds for that purpose.
“You just can’t raise that much money with cigarette taxes,” said Hunter, D-Medina. “Rather than do 15 little things, I’d rather do something structural that improves the tax code by making it less regressive.”
State officials predict fewer packs of cigarettes would be sold if a new 50-cent tax were implemented, and have accounted for that when estimating how much revenue such a tax would generate.
They’re not sure, however, how much of the expected dropoff would be tied to people quitting smoking, and how much could be attributed to increased smuggling. The Department of Revenue hasn’t completed that analysis yet, a spokeswoman said.
Hill, the Senate budget writer, questions whether the state would be better off by cracking down on existing smuggling than by raising the cigarette tax rate.
In 2013, the state estimates it lost about $319.7 million in revenue due to people buying untaxed packs of cigarettes, according to the Department of Revenue.
Hill said he is exploring whether to boost funding for the state Liquor Control Board, which enforces tobacco tax rules, if it would help the state capture more tobacco tax revenue.
The Liquor Control Board no longer has a dedicated tobacco tax unit as it once did, said agency spokesman Mikhail Carpenter. Instead, all of the liquor board’s officers now share tobacco enforcement responsibilities, which mainly include conducting spot checks for contraband products at tobacco retailers, Carpenter said.
“Due to budget constraints we have had to be strategic in allocating our resources,” Carpenter wrote in an email.
WASHINGTON’S LOSS, OREGON’S GAIN
Another area might benefit from Washington increasing its tax on cigarettes, and it lies directly to our south.
After Washington last increased its cigarette tax by $1 a pack in 2010, the average number of cigarettes sold yearly in Washington dropped by about 20 million packs, according to the state Department of Revenue.
At the same time, the number of packs sold in Oregon – where the state tax was about $2 less per pack – rose by an average of 13.5 million per year, the department reported.
That’s after accounting for an overall downward trend in cigarette consumption, meaning that much of the shift was probably due to Washington residents buying cigarettes in Oregon to evade the new tax, said Stephen Smith, tax policy specialist with the Department of Revenue.
“We used to sell more taxed packs than Oregon, and after that tax increase, suddenly they sell more packs than we do,” Smith said. “And they have a smaller population than we do.”
Smith said he suspects people who live in Clark County and commute to work in Portland, Oregon, may have changed where they buy cigarettes as the result of Washington’s new tax.
Sen. Sharon Brown, R-Kennewick, said the problem is rampant in other areas near the Oregon border, too, including her Central Washington hometown.
“For those of us living in the border communities, we actually see this happening,” Brown said.