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July 25, 2018

In November, South Dakota voters will decide whether to increase taxes on cigarettes and other tobacco products (OTPs). If successful, the ballot initiative would increase taxes by $1 on 20-cigarette packs and $1.25 on 25-cigarette packs. The tax on OTPs would increase from 35 percent of the wholesale price to 55 percent.


Lawmakers claim the taxes are necessary to fund postsecondary technical education. However, increasing taxes on tobacco unjustly punishes smokers and creates unstable tax revenue streams.


South Dakota, like many states, uses very little of the tobacco tax revenue it collects on cessation programs. Currently, the Mount Rushmore State deposits the “first $30 million of tobacco revenue collected annually … into the State general fund.” The next $5 million is placed “into the existing tobacco prevention and trust fund.” The ballot initiative would “require the next $20 million to be deposited into the technical institute created by [the] measure,” according to the proposal.


Although often portrayed as measures to generate revenue, high cigarette taxes typically result in consumers choosing to purchase cigarettes in neighboring states with lower tax rates or through black markets. These unintended consequences often end with less-than-expected total state revenue. In some cases, revenue is even lower than before the tax increase was implemented.


At $1.53 per pack, South Dakota’s cigarette tax is lower than the national average ($1.68 per pack), but it is “higher than four of its six bordering states.” Furthermore, South Dakota already ranks 14th among all states for its high rate of cigarette smuggling, according to the Tax Foundation.


To understand the negative impact high cigarette taxes often have, South Dakotans ought to consider what happened after Minnesota increased its tobacco taxes. A 2014 report by John Dunham and Associates examined the economic consequences of a recent cigarette tax increase in the North Star State. Border communities experienced “per capital sales losses of 27% to 42%,” with per capital sales in border regions dropping “by 30.1 percent in the aftermath of the tax increase … 50 percent larger than the estimated 19.8 percent reduction statewide.” Making matters worse, the tax increase “put more than 1,100 Minnesotans out of work.”


Like most sin taxes, tobacco taxes are an unreliable source of revenue. Although sin taxes usually create short-term revenue increases, they very frequently generate lower funds in the long term. For example, between 2001 and 2011, “revenue projections were met in only 29 of 101 cases where cigarette/tobacco taxes were increased,” the National Taxpayers Union Foundation (NTUF) found. Moreover, the number of adult smokers is declining and “consumers often supplant cigarettes with alternative products that are taxed at lower rates,” NTUF notes. South Dakotans should realize that raising tobacco taxes in no way guarantees more revenue will be earmarked for technical education over the long term.


Besides their unstable nature, cigarette taxes are also highly regressive and disproportionately impact lower-income persons. From “2010 to 2011, smokers earning less than $30,000 per year spent 14.2 percent of their household income on cigarettes, compared to 4.3 percent for smokers earning between $30,000 and $59,999 and 2 percent for smokers earning more than $60,000,” a Cato Journal article determined.


High tobacco taxes disproportionately impact lower-income individuals, foster black market activity, hurt small businesses, and are unreliable sources of revenue. Come November, voters in the Mount Rushmore State ought to snuff out regressive and unreliable tobacco tax hikes.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute or Tobacco Harm Reduction 101.

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