The State Budget and the Tobacco Tax

One of the aspects of the new state budget that Liberals particularly love to attack the 10-cent decrease in the tobacco tax. While everyone fully appreciates that tobacco is unhealthy, it is legal, and the reality is that New Hampshire relies on this revenue source and should focus on all areas where we can enhance our competitive tax advantage.

The head of the New England Convenience Store Association reports tobacco sales at the state's 828 outlets make up nearly 50 percent of all sales. In recent years, tobacco tax revenue dropped significantly as Democratic legislatures and Gov. Lynch approved raising the tax four times in six years. As a result, we reached the tipping point of losing our cross-border tax advantage to Maine. However, with Vermont raising its tobacco tax by 38 cents in their recent budget and Massachusetts raising theirs by a dollar, we have an opportunity to increase state revenue by $13 million by sharpening our border advantage, according to economists at Southern New Hampshire University.

However, there is a greater context to this discussion. The tobacco tax is one of 20 major sources that make up the revenue necessary to fund New Hampshire’s biennial budget. At one time tobacco revenue from out of state shoppers was estimated at approximately 30 percent. As our neighboring states have increased their taxes it is predicted that it may now have gone as high as 40 percent.

For every dollar spent on tobacco products in New Hampshire there is more than $6.40 in collateral sales: canned beverages (no deposit) snack food, and other various retail items. The competitive price of cigarettes and lack of a sales tax serve as a retail magnet to shoppers from surrounding states. State statistics show that New Hampshire averages approximately 12 percent of those employed are in retail, as opposed to nine percent for surrounding states.

This especially rings true with a recently released study conducted on the impact of a cigarette tax increase in other states in similar situations as New Hampshire.  The study found that for every $.01 of additional tax, one can subtract a mile an out of state consumer will travel to save the on their purchase. A $.28 tax means a reduction of 28 miles in radius of Massachusetts, Vermont, and Maine border consumers who will no longer make the trip. Add in the durable goods, retail goods, alcohol, lottery tickets, meals, etc. and the loss adds up quickly.

Critics also argue that a societal benefit to high tobacco taxes is to deter smokers or potential smokers from retaining the habit or taking it up to begin with. However, we believe that regulation of an individual's choices and behavior is not the role of the government. Additionally, we need to remember that the cigarette tax produces large revenue only because we sell so many to out of state consumers, this makes the price/sales curve non-linear. Normally as prices go up sales tend down on a linear base.

With tobacco in New Hampshire, however, this is not true. New Hampshire smokers most likely will reduce their purchase of cigarettes in proportion to any increase in price. However, this will not be how the out of state buyer will react if the tax is raised. Some may buy fewer cigarettes when they come to New Hampshire but some, it is likely, will simply stop coming.

If the savings are not worth the trip (a point of diminished returns) non-residents will elect to save the cost of gas and pay the taxes to their home state. The spending advocates pushing the increased cigarette tax never mention this.

Our revenue stream has developed over many years, with experienced legislators always trying to gauge each modification for its effect on the other taxes that make up New Hampshire’s overall revenue stream. In the past things have rarely worked out exactly as predicted. It takes the debate and good judgment of 400 members of the House of Representatives, plus the 24 state Senators to continue to deliver the least intrusive tax system in the country, and also the least burdensome. We have discovered many times in the past that the public will go to extraordinary efforts to evade taxes; we feel that our fellow legislators did the same with this budget.

New Hampshire has a fairly balanced set of taxes. They can be relied upon in good times and bad to produce a reasonably predictable revenue stream. This allows the state to operate with a minimum of fluctuation. The roughly 20 sources in the revenue stream also require us, as legislators, to review on a regular basis our taxes and tax policy, making the Legislature more accountable to the voters of New Hampshire.

We all hate tobacco but from an economic stand point we should always seek to further capitalize on the willingness of our high-tax neighbors to give their citizens an incentive to shop in New Hampshire.