Cigarette excise tax increase is not good for Nebraska, and here’s why.

February 21, 2024 3:00 am

Cigarette brands are displayed at a tobacco shop on July 11, 2014, in San Francisco. (Justin Sullivan/Getty Images)

During my time in the Nebraska Legislature, including time as chairman of the Revenue Committee, I witnessed many attempts to increase the state’s cigarette excise tax. These attempts were often accompanied by well-meaning arguments for improved public health, but they were always driven by an ambition to increase state tax revenues for one purpose or another.

The Nebraska Legislature is once again considering proposals to increase the cigarette excise tax, but this time for the purpose of property tax relief. Although providing property tax relief is certainly a worthy goal, let me share a few reasons why I opposed past schemes to increase the cigarette excise tax and why I continue to feel this is an unwise move for Nebraska.

First, cigarette excise taxes are not a stable source of revenues for any purpose, and especially not for property taxes required for local services. According to the National Conference of State Legislators, increases in such taxes usually yield lower-than-expected revenues.

Cigarette smoking has been falling steadily, from 20% of the population to 13% in the past 10 years. So as consumption shrinks, promises of sustainable property tax relief will be jeopardized. But if this argument is questioned, consider that income from Nebraska’s cigarette excise tax was $42.8 million in 2022, nearly $10 million less than five years earlier, further illustrating that cigarette tax revenue is declining and would be a wobbly foundation for a property tax relief fund.

My second reason focuses on the illegal activities that could be sparked by such a drastic increase in Nebraska’s cigarette excise tax. The federal Bureau of Alcohol, Tobacco, Firearms and Explosives estimates that $7 billion to $10 billion in state and federal tax revenue is lost to contraband activity annually because of cigarette tax increases.

The Tax Foundation, a nonpartisan think tank in Washington D.C., says that “policymakers interested in increasing tax rates should recognize the unintended consequences of high taxation rates. Criminal distribution networks are well-established and illicit trade will grow as tax rates rise.”

My final reason for arguing against the current proposal being discussed in Lincoln to increase the cigarette excise tax is its crippling impact on Nebraska businesses and citizens.

At $2.64 per pack according to the current proposal, Nebraska’s cigarette tax rate would jump to the highest among the Plains states. If you raised the excise tax to $2.64 per pack, the state/local tax portion of a pack of cigarettes would swell to $3.38 – fully 30% of a selling price of $11.30 per pack, creating a wallet incentive for Nebraskans to divert their cigarette purchases to surrounding states with lower tax rates.

Many of Nebraska’s 2,730 licensed retailers of tobacco would lose cigarette business in competition with stores in neighboring states, where cigarette prices would be comparatively lower totally because of lower state tax rates.

It is also not fair to lower-income people, who comprise the majority of smokers, to pay an average $720 more per year in taxes. Based on data from the U.S. Centers for Disease Control and Prevention, 25.8% of adults in Nebraska who earn less than $15,000 are smokers, while only 8.5% of adults who earn $100,000 are smokers.

In summary, the evidence clearly shows that rampant casual and commercial tax avoidance triggered by a steep increase in Nebraska’s cigarette tax rate would hurt lower-income smokers, harm licensed retailers, spur increased law enforcement expenditures and prove unreliable as a source of funds for property tax relief.

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Jim Smith
Jim Smith

Jim Smith represented District 14 in the Nebraska Legislature from 2011- 2018, where he chaired the Revenue Committee and the Transportation and Telecommunications Committee. He was CEO and chief architect of Blueprint Nebraska and currently serves as the chief strategy officer for the Platte Institute. He is a former business owner and spent more than 25 years in the electric and gas utility industry.