Maine’s Proposed Increase in Taxes (LD 1423):

Written Testimony of David R. Hancox, CIA, CGFM (Ret.)

I. Introduction

My name is David Hancox, and I am the former Director of State Audits in the Office of the New York State Comptroller. I also was Director of State Expenditures in that Office. In total, I had 37 years of service with the State of New York. I am a retired Certified Internal

Auditor and Certified Government Financial Manager. I’ve also written and taught extensively on a wide array of issues focused on government performance auditing, which relates to an assessment of planning, implementing, and managing government programs and policies, such as the effects of increasing taxes on various consumer products.

At the outset, a few points are in order. First, RAI Services Company (“Reynolds”) has compensated me for my time preparing these comments, but, second, the opinions expressed are my own. Third, I am not a user of products, I am not an advocate for using tobacco, and

I believe smokers of traditional should quit.

My career focused on determining why some government programs failed to meet their intended objectives. In many of these cases, I found that policymakers seeking to positively impact their constituents' lives often missed the opportunity in the design stage to more fully assess the foreseeable consequences and risks of implementing these programs and policies.

Before you take the drastic step of doubling taxes on cigarettes and all other tobacco products, I urge you to consider the ramifications and likely consequences of a tax increase of this magnitude. A doubling of tobacco taxes will place a significant burden on a relatively small group of Mainers. And doubling taxes on non-combustible tobacco products may actually harm public health in Maine. 1

II. Summary

While an increase in the cigarette tax might at first appear to offer a quick injection of cash to the State’s coffers that affects only a small percentage of the State’s residents, in implementation, such a tax is simply bad public policy. Importantly, because the cigarette tax determines the tax on other tobacco products, a “Yes” vote on LD 1423 will double the tax on all tobacco products sold in Maine. Doubling tobacco excise taxes will create unintended and foreseeable consequences that will increase costs in other areas of the State’s budget. You should anticipate:

 An increasing tax burden on residents’ least equipped to shoulder the

financial load.

 A sharp decrease in convenience store sales may result in the closure of

struggling small businesses and significant job losses.

 A skyrocketing rate of smuggling of lower-cost tobacco products, primarily

cigarettes, from nearby states, along with increased spending on law

enforcement to combat the high-level, high-dollar illicit tobacco trade

drawing terrorist and other criminal enterprises into Maine.

 A reduction in the appeal to current Maine smokers of non-combustible

tobacco and nicotine products that the FDA has determined to be a benefit to

public health.

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While projecting anticipated revenue is always a difficult task, a recent study by the

Thomas Jefferson Institute of Public Policy shows cigarette excise tax increases rarely generate

1 new income to the taxing jurisdiction. And a cigarette tax is a regressive tax that consumes a

much more significant percentage of the income of lower-wealth Mainers.

What is certain is that increasing the price of cigarettes and all other tobacco products

will result in a rising rate of not only small-time, individual cross-border sales of less

expensive cigarettes, but also in the high-level, high-dollar criminal industry of the illicit

tobacco trade. The loss of a significant portion of the legal tobacco sales in Maine may cost

your State jobs. And a doubling of taxes on alternative, non-combustible tobacco products in

Maine will limit current smokers’ incentive to switch to non-combustible tobacco products the FDA has determined are appropriate for public health. For all of these reasons, you must vote “No” on LD1423.

III. A Cigarette Excise Tax Disproportionately Impacts Those Least Prepared to Shoulder a New Tax Burden

Cigarette sales in the country and Maine are – and have been for many years – falling.

Today, only about 17 percent of adult Mainers smoke,2 and only about 20 percent use any tobacco product, including oral tobacco and e-cigarettes, or other vapor devices.3 That means, of

1 http://www.thomasjeffersoninst.org/files/3/2019_cig_tax_study.pdf 2 http://assets.americashealthrankings.org/app/uploads/maine-annual-summary-2020.pdf 3 Based on tobacco use data from the 2017 Behavioral Risk Factor Surveillance Survey and Maine census data. 3

the roughly one million adults in Maine, one-fifth of them, or about 192,000 people, will be

burdened with generating a roughly $169 million increase in revenue – or about $880 annually

per person. Further complicating this picture is that a significant percentage of those same people are the least prepared to carry this burden. According to the U.S. Centers for Disease

Control and Prevention, people living below the poverty level and those with lower levels of education are more likely to smoke than the general population.4 And a Cornell University study

found that each $1-increase in cigarette tax results in a roughly 15 percent increase in the use of

food stamp programs among eligible households with smokers.5

The facts specific to your State are stark. Approximately 30 percent of Maine’s smokers

earn $25,000 or less per year6 and already spend a significant amount of their discretionary

income on state cigarette taxes. In fact, they already pay $139.4 million in tobacco taxes

annually and another $29.7 million in associated sales tax.7 A doubling of taxes already shouldered by Maine’s lower-income residents is unfair and not good public policy.

IV. A Cigarette Excise Tax Harms Small Businesses and Will Cost Jobs

An increase in tobacco product excise taxes will decrease legal, in-state purchases of cigarettes and other tobacco products in Maine. According to data from the National Association of Convenience Stores, cigarette sales alone comprise 37.4 percent of an average convenience store’s monthly merchandise sales and 18 percent of an average store’s gross profit.8

Furthermore, a decrease in cigarette and other tobacco product sales also means a significant

4 https://www.cdc.gov/tobacco/disparities/low-ses/index.htm 5 https://www.lawschool.cornell.edu/SELS/upload/CELS_KyleRozema.pdf 6 2017 Behavioral Risk Factor Surveillance Survey. 7 Based on wholesaler to retail store sales reported by Management Science Associates 8 http://www.thomasjeffersoninst.org/files/3/2019_cig_tax_study.pdf (page 16) 4

decline in the other purchases consumers make along with tobacco purchases. Data presented at the 2013 annual meeting of the Tobacco Tax Section of the Federation of Tax Administrators suggest that for every $8 spent on cigarettes, purchasers spent nearly $7 on non-tobacco products.9

Adding ancillary product losses, every convenience store in Maine stands to lose

substantial gross profits to a doubling of taxes on tobacco products. Maine’s tobacco retailers sold approximately $539 million in tobacco products in 2020, including $465 million in cigarette sales, $38 million in moist snuff sales, and $37 million in e-cigarette sales.10 And those sales

produced an additional $471 million in ancillary purchases.

This billion-dollar-a-year activity provides jobs, and significant revenue to Maine, including sales tax and income tax. Orzechowski and Walker project that the proposed tobacco tax increases would cost Maine’s tobacco retailers 25 percent of their tax-paid sales of tobacco products alone – about $135 million – and that $46 million in ancillary product sales also may be at risk.11 Each convenience store in the State could lose up to $30,000 in gross profits from the

combined loss of tobacco and ancillary product sales.12 Hundreds of retail clerks could face a

job loss, and, in the worst cases, some stores may shutter. And these data do not specifically

address the ramifications on other jobs this industry creates, including wholesalers, delivery

workers, and others.

9 Presentation by Don Burke, Senior Vice President, Management Science Associates, Inc., at the Federation of Tax Administrators’ Annual Meeting (Tobacco Tax Section), Albuquerque, New Mexico, Aug. 13, 2013. 10 Wholesaler to retail store sales reported by Management Science Associates. 11 Orzechowski and Walker, The Economic Impact of a Ban on Menthol-Flavored Cigarettes and in Maine Combined with a $2.00 per Pack Cigarette Tax Increase 12 Id. 5

V. The Proposed Tax Increase Will Drive Illicit, Cross-Border Sales

An increase in Maine’s cigarette tax undoubtedly will encourage Mainers to cross close state borders to purchase less expensive cigarettes. More than half of Maine’s residents live within a 40-mile drive from the New Hampshire border. As has happened in the past, a tobacco tax increase in Maine invites Mainers to make a relatively easy drive to purchase cheaper cigarettes in a nearby state with significantly lower tax rates. Hundreds of retailers sit tight on

Maine’s borders, poised to serve these customers.

Putting aside the legality in Maine of possessing cigarettes without proper tax stamps, cross-border sales equal a significant loss of revenue to Maine. Even worse, an increased cigarette tax invites a new criminal element into your State from the well-established illicit tobacco trade. Today, Maine has a limited but significant cigarette smuggling trade, with just more than 8 percent of cigarettes – about 5 million packs annually – smoked here arriving illegally.

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However, because of its relatively low tobacco tax rates and lack of sales tax, your next- door neighbor, New Hampshire, is a favorite spot for consumers to purchase products for personal use. New Hampshire has an outbound smuggling rate of 66.8 percent – one of the highest in the nation.13

13 https://www.mackinac.org/smokes#map 7

Today, a carton of cigarettes is $7.40 cheaper in New Hampshire than in Maine. A $2 per pack increase in Maine’s cigarettes tax will drive that price differential to $27 a carton – a nearly

60 percent increase. In 2005 – the last time Maine’s legislature doubled the tax on cigarettes, the cross-border phenomenon was well documented. Seacoastonline.com reported that just a week into that tax increase, stores in Portsmouth, New Hampshire, experienced increased sales to

Mainers crossing the border for a discount.14 A 51-year-old Portland man told the website he had purchased five cartons in a Portsmouth store and saved himself “$100 easy.”15

14 https://www.seacoastonline.com/article/20050926/news/309269995 15 It is worth noting here that, under Maine law, state residents who bring more than two cartons of cigarettes without Maine tax stamps are committing a criminal act, and could face both fines and jail time of up to one year.15 Once again doubling cigarette taxes seeds this market and risks criminalizing a portion of your State’s population. 8

New York, my home state, provides an astonishing example of how price differentials drive the “black market.” While the Bronx (in New York City) has a population of 1.4 million people, Albany County (in Upstate New York) has a population of just 305,000. Although

Albany County’s population is one-fifth the size of the Bronx, Albany County’s retail revenue from cigarette sales dwarfs cigarette retail revenue in the Bronx – by more than $16 million.

The Bronx’s low legitimate cigarette retail revenue is a direct result of New York City’s $1.50 per pack excise tax and its prime location on the I-95 cigarette smuggling corridor. You must anticipate a similar result in Maine, where the per-pack tax differential with New Hampshire will be $2.22, should you double the current cigarette tax. And just like the Bronx, many of Maine’s major population centers are on or near the well-established I-95 cigarette smuggling corridor.

While cross-border sales allow individuals to thwart the effects of excise tax increases, this well-established route is a more insidious problem. It involves criminal enterprises and terrorist organizations.16 The black market for cigarettes is very lucrative, and the penalties for getting caught are significantly less than for other crimes. LD 1423 invites a

16 https://www.atf.gov/file/11196/download, https://www.icij.org/investigations/tobacco- underground/terrorism-and-tobacco/ 9

smuggler to make tens of thousands of dollars by driving just one van load of cigarettes from a

state on the southern end of I-95 into Maine.

A tractor-trailer load could generate $1 million or more.17 Increased cigarette excise taxes mean increased cigarette smuggling, as shown in the graph below. You must anticipate a dramatic increase in smuggling and related illegal activity, requiring more law enforcement efforts and spending if tobacco taxes are doubled in Maine.

17 https://www.twincities.com/2019/10/06/how-tobacco-smuggling-costs-minnesota-hundreds-of-thousands- of-dollars-a-year/ 10

From a public policy perspective, you must assess the risk now, before taking this step, that increasing cigarette taxes will create foreseeable, unintended consequences. Combatting this dangerous increase in smuggling activity will require a significant increase in funds dedicated to law enforcement efforts to control or stem the influx of illegal activity. That increase in law enforcement resources, in turn, raises troubling and complicated issues, as we saw in New York in the summer of 2014, when police killed Eric Garner in a confrontation precipitated by

Garner’s selling “” – individual, untaxed cigarettes – in New York City.

VI. The Proposed Tax Increase Makes Tobacco Products That Benefit Public Health Less Acceptable to Current Smokers

A doubling of the tax on all tobacco products, including non-combustibles, such as oral tobacco and vapor or e-cigarette products, ignores the benefits of making less risky tobacco

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products more acceptable to Maine’s current smokers. The FDA’s process for authorization of marketing some tobacco products as modified risk tobacco products (“MRTP”) and its processing of applications for tobacco products new to the market (Pre-Market Tobacco

Application or “PMTA”), including vapor products and other alternative nicotine products, both reflect the FDA’s recognition that true, effective requires making available tobacco products that are less risky to current tobacco users than traditional combustible cigarettes.18

In considering either an MRTP or PMTA, the FDA determines the risks and benefits of the product to the population as a whole, including both users and non-users of tobacco products.19 This includes assessing whether current tobacco users will be more likely to switch to the new product and whether the new product might entice non-tobacco users to begin using tobacco products (with the goal to ensure they will not). Retailers in Maine currently sell

18 https://www.fda.gov/tobacco-products/about-center-tobacco-products-ctp/mitch-zeller 19 Id. 12

tobacco products authorized by the FDA for marketing as modified-risk tobacco products. It is

anticipated the FDA will make its first authorizations of vapor and other new tobacco products

for marketing later this year.

Today, Maine taxes vapor products at 43 percent of wholesale value. This tax bill would

double this to 86 percent of wholesale – the second-highest tax on vapor products in the nation.

And LD 1423 would make a tin of smokeless tobacco more expensive than a pack of cigarettes.

Increasing taxes on these products is at odds with encouraging smokers to switch from

combustible cigarettes to less risky tobacco products. Other states have considered adjusting

their tobacco taxation schedules to leverage increased usage of these less-risk products. In fact,

your New England neighbor, Connecticut, revised its taxing structure in 2017 to recognize the

public health benefits of these lower-risk products by slashing by 50 percent the excise tax on

any product receiving MRTP authorization from the FDA.

But Maine law today simply does not allow you to do that. A “Yes” vote on LD 1423

necessitates a 100 percent increase in excise taxes on all tobacco products. Decreasing consumer

acceptability of these products limits the benefits of the FDA’s consideration of the science on

tobacco harm reduction for Maine’s smokers. That cannot be in in their best interests, nor can it

be what you intend when considering an increase in cigarette taxation.

VII. Conclusion

The desire to raise increase State tax revenues and to improve public health in Maine

present significant and important public policy challenges. But doubling excise taxes on

cigarettes will force a small amount of Mainers to shoulder an increasing tax burden, put at risk

small businesses and jobs, and increase criminal activity here. And doubling taxes on all other

non-combustible and less risky tobacco products, including smokeless tobacco and vapor 13

products, will undoubtedly reduce these products' acceptability to Maine’s current smokers. I urge you to vote “No” on LD 1423.

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