Maine’s Proposed Increase in Cigarette 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 tobacco products, I am not an advocate for using tobacco, and I believe smokers of traditional cigarettes 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. 2 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 Flavored Tobacco 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. 6 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.