My April 21, 2011 Testimony Against HB 156-FN

"AN ACT reducing the rates of the tobacco tax"

Additional commentary by Timothy Horrigan; June 16, 2011

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The tobacco tax was the last piece of the 2011 New Hampshire state budget. Speaker O'Brien & Co. put it in at the very last moment. Supposedly it will be at least "revenue-neutral" which can only happen if sales go up 6% or so (which is bloody unlikely.) It will definitely lead to more smoking: not enough to pay for itself, but it will lead to more smoking. Why is more smoking a good thing? God only knows, although supposedly the extra sales will all come from bargain-hunting smokers driving north from Massachusetts. I have spoken against this measure several times, but April 12 was the only time I prepared written testimony. My testimony went over fairly well, and the Senate did stand firm against this tax decrease, until they finally caved in at the end of the budget conference committee process in mid-June.

Testimony Against HB 156-FN

AN ACT reducing the rates of the tobacco tax.

Rep. Timothy Horrigan; Strafford #7; April 12, 2011

The tobacco tax is levied on an inherently undesirable commodity. The less tobacco gets consumed, the better off the state will be. Tobacco is dangerous and unhealthy: It is in the state's interest to discourage its use. However, HB 156-FN, "AN ACT reducing the rates of the tobacco tax," is one of the few tax cut bills which the House actually passed and sent on to the Senate (as opposed to Tabling the bill after an Ought to Pass motion.)

We heard a lot of talk about cutting taxes over on the House side of "the wall" this session. But very few tax bills were actually sent to the Senate, as you can see by looking at the Senate Ways & Means Committee docket. The House only sent 9 Ways & Means bills to the House, not all of which were tax bills. Including the budget trailer bill, which has some fee cuts in it, by my count the House has only passed five bills which cut taxes or fees. HB 156-FN was one of them, even though it is a very bad bill. HB 156-FN serves only to put money into the pockets of out-of-state tobacco companies which could be used to provide services and/or tax relief to the people of New Hampshire.

The committee will be hearing that revenues might actually go up if we lower this tax rate. There is no evidence to support the claim: here in New Hampshire, the rate has gone up from 52 cents in 2005 to $1.78 in 2011. Revenues have gone up steadily, even though there has been a recession much of that time and even though fewer and fewer people smoke. Our sister state of New York raised the tax rate dramatically last year from an already-high $2.65/pack to $4.35 ($5.85 in New York City) last year: unit sales went down about a third but revenues still increased almost 20%.

Just to break even on the proposed tax rate cut, unit sales of cigarettes would have to go up 6%. That is an extremely optimistic assumption at a time when smoking is becoming less popular. Unit sales have gone up only 3 times in the last 30 years. Unit sales of tobacco stamps (at one stamp per pack) in Massachusetts and the three northern New England states dropped 23% between FY 2007 and FY 2010, even though revenues in all four states increased thanks to raised tax rates.

The committee will also be hearing many anecdotes about out of state smokers stocking up in New Hampshire. I myself have noticed little if any such stocking-up going on: most smokers buy one pack at a time, forgoing the discount they could get by purchasing by the carton. (I also see very few smokers rolling their own, which saves even more money than buying a whole carton of cigarettes.) My casual observations indicate that few if any visitors seem to be hauling carloads of cigarettes across state lines to evade taxes in their own state, which is in any case illegal. I am aware that some entrepreneurs who buy truckloads to resell them in places like New York which have high tobacco taxes. I have even seen them in action at a local discount store. Those black marketeers are, strictly speaking. felons.

I might add that the state tax is just one of the factors which makes cigarettes expensive: there is a federal tax and the product itself is not cheap. Even the most inexpensive value brands cost roughly $5.00 a pack. This bill would only lower the cost of even the cheapest pack of cigarettes by 2%, assuming the tax decrease is in fact passed on to the consumer. There are dozens of brands of cigarettes, some of which command premium prices. A pack of Players, for example, costs about $4.50 more than a pack of a basic "value brand."

The proponents of this bill are assuming a dramatic shift in consumer behavior based on a small decrease in price— a decrease which might not even happen. This is not a realistic assumption. Cigarettes are an expensive product which kills, and tobacco consumers are not highly price-conscious.

I haven't addressed the issue of non-cigarette tobacco products, whose tax rate would go down to 48% of wholesale value (down from the current 65.03%) This is a tiny segment of the market: about 1.4% of the overall tobacco market, according to the NH Department of Revenue Administration. This includes "roll your own" tobacco, as well as snuff and chewing tobacco. Those latter "smokeless" products (especially the flavored varieties) are a popular gateway drug for teenagers. There is not much revenue to be gained or lost from that segment of the market, but the available evidence suggests that the state makes more revenue at the current 65.03% rate than it would at the proposed 48% rate.

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