Update: LB 1013 was not advanced in committee in the 2016 legislative session. That’s one less tax increase to worry about!
LB 1013, a proposed $1.50 per pack increase in state cigarette tax, is receiving praise from medical groups, firefighters, and even the Farm Bureau. These organizations say the higher tax will generate more funding for health care causes, property tax relief, and provide a greater incentive for smokers to kick the habit.
It sure sounds great. After all, who could be against a tax you never have to pay, that helps pay your taxes, and that stops people from smoking? Unfortunately, relying on smokers to pay your taxes for you is about as bad of an idea for the budget as taking up smoking is for your health.
Stable tax revenues depend on large, reliable tax bases, but the cigarette tax base is not very reliable or broad. Only about 17 percent of adults in Nebraska are smokers, and as that number declines, fewer people are paying the tax.
Recent history in Nebraska is instructive. In 2002, the state nearly doubled the cigarette tax, from 34 cents to 64 cents a pack. Revenue did go up at first, but has since declined nearly every year after the increase. Taxable sales of cigarettes have declined as well. After adjusting for inflation, cigarette tax collections are now lower today than before the increase.
Some may think this fact only justifies another increase or is a sign of successfully pushing smokers to quit. But cigarette taxes are one of the easiest taxes to avoid without quitting smoking. If the tax were to increase 234 percent from 64 cents a pack to $2.14, smokers would have numerous alternatives.
In our neighboring states with higher cigarette taxes, smuggled cigarettes make up as much as 22 percent of the cigarettes consumed, while low cigarette tax states like Missouri and Wyoming are leaders in exporting smuggled cigarettes. Not all smuggling is conducted by criminal enterprises. Smokers can travel to a bordering state to buy cartons of cigarettes and they can buy online. They can also buy pipe tobacco and roll their own cigarettes.
At $2.14 a pack, a pack-a-day smoker would save $719 in taxes a year by buying cigarettes from Missouri, at 17 cents a pack.
A statistical model by the Michigan-based Mackinac Center for Public Policy projects that under LB 1013, Nebraska would become a regional destination for cigarette smuggling. Under today’s relatively low cigarette tax, only 2.8 percent of the cigarettes in Nebraska are smuggled in. But with the highest cigarette tax among our surrounding states, Mackinac estimates Nebraska would rocket to the country’s fifth highest percentage of smuggled cigarettes, at over 32 percent of the market.
Supporters of the tax increase believe it will collect more revenue while reducing the consumption of cigarettes, saving the state money on public health costs. But findings published by the National Bureau of Economic Research state that “adult smoking is largely unaffected by taxes,” meaning that reductions in cigarette consumption are not typically a response to recent changes in tax policies, but mostly a product of the public’s turn away from tobacco use that has been on-going for decades.
All taxes are the price of government spending. A higher cigarette tax does not mean the cost of property taxes will be cut. It means the cost will be shifted over to other taxpayers, in the hope they will pick it up.
But that hope may be misplaced.
Tax avoidance behaviors that are now common in other states with high cigarette tax rates will make the property tax relief side of LB 1013 go up in smoke. Nebraska’s existing public health costs for treating smokers won’t disappear overnight, but the revenues lawmakers seek certainly could.
 Centers for Disease Control and Prevention. State Tobacco Activities Tracking and Evaluation Systems, State Highlights. URL: http://nccd.cdc.gov/STATESystem/rdPage.aspx?rdReport=OSH_STATE.Highlights
 Nebraska Department of Revenue. “Annual Cigarette Tax Summary, 1962-2014.” URL: http://www.revenue.nebraska.gov/research/annual_report/cumulative/misc_taxes/MSC_2_Annual_Cig_Tax_Summary.xls
 Author’s calculations based on CPI Inflation calculator, Bureau of Labor Statistics. URL: http://data.bls.gov/cgi-bin/cpicalc.pl
 Scott Drenkard & Joseph Henchman. “Cigarette Taxes and Cigarette Smuggling by State, 2013.” Tax Foundation. Feb. 6, 2015. URL: http://taxfoundation.org/article/cigarette-taxes-and-cigarette-smuggling-state-2013-0
 Michael LaFaive & Todd Nesbit. “Taxing Our Way to Higher Crime.” Lincoln Journal Star, opinion. Feb. 13, 2015. URL: http://journalstar.com/news/opinion/editorial/columnists/local-view-taxing-our-way-to-higher-crime/article_4208880a-1df3-5aef-9a8c-26194960c6a6.html