The last time Kansas raised its cigarette tax, from .24 to .79 cents, tobacco retailer Steve Barbour pulled up stakes at his two Johnson County Cigarettes 4 Less stores and moved them just across state line – a relative stone’s throw from Johnson County – where the state cigarette tax is the lowest in the nation, at a smooth and mild 17 cents a pack.

Today Barbour says his two stores, at 81st and State Line and 103rd and State Line, have never been busier, and if Kansas passes another 75-cent per-pack increase as proposed by the Kansas Health Policy Authority and Gov. Kathleen Sebelius, he figures business will pick up even more.

“Right now, the per carton tax here in Missouri is about $3.20 because there’s a city tax on top of the state tax,” Barbour said. “The Kansas tax alone is now about $8 a carton, so it’s a noticeable difference.”

If the tax increase is approved the per pack state tax would be $1.54.

“If it goes up again by that much, no doubt it will help me,” Barbour said. “But not every Johnson County smoker is going to go across state line. If they did, I’d be busier than Wal-Mart.”

Still, he said he believed a small percentage of Johnson Countians would make the short trek to one if of his stores to save up to $15 a carton if the tax hike is approved. Barbour speculated that some smokers in Kansas eager avoid the tax increase also would switch to a cheaper generic brand, or consume fewer cigarettes.

“It would sure give me more job security if this goes through,” Barbour said. “Our sales will definitely go up.”

Statistics show that, in fact, Kansas smokers do find a way around high cigarette taxes.

When the state cigarette tax was last increased in 2002 from .24 to.79 cents, cigarette revenue to the state initially spiked, to $129.2 million.

It’s been downhill from there.

According to state budget figures, cigarette tax revenue plummeted by more than $10 million in 2004, to $119.8 milion. Revenue was down again in 2005, to $119 million, and then again, to $117.9 million in 2006. Last year, cigarette tax revenue was only $116 million.

The flight of cigarette tax dollars from one state to another in the wake of tax hikes has been well-documented.

Last year, the Kansas chapter of Americans for Prosperity brought Dr. William Orzechowski, senior partner in the economic consulting firm of Orzechowski and Walker to testify on a proposed 50-cent increase in the per-pack cigarette tax. That increase failed to get through the Legislature. 

Orzechowski pointed out that after the 2002 tax increase, sales in Kansas dropped 22 percent, from 208.8 million packs to 163.7 million packs, while Missouri saw sales increase by 55 million packs in 2003. By 2004, sales volume in Kansas had further declined to 153.5 million packs.

“This was a very sensitive reaction to the tax hike, but is normal for states that border low-tax states and have a significant portion of the population living near such areas,” Orzechowski told lawmakers. “Kansas certainly fits this category since nearly 42 percent of its population lives in border counties. In fact, approximately 32 percent of the Kansas population resides along the low-tax Missouri border.”

Barbour pointed out that cigarettes are already perhaps the most heavily taxed product in the nation.

“The manufacturing cost for a carton is about $4,” he said. “The government now makes more profit on a carton of cigarettes than the manufacturer, the wholesaler and the retailer combined.”

According to cigarette manufacturer RJ Reynolds, the current average per pack price in Kansas is $4.33.

Of that, a total of $2.05, or 47 percent, goes to the state. That’s both from sales tax revenue and revenue from a tobacco settlement negotiated by state attorney generals.

“Government says on the one hand you shouldn’t smoke, but they couldn’t make payroll if they had to do without that revenue,” Barbour said.

Supporters of cigarette tax increases, including the Kansas Health Policy Authority and Gov. Sebelius, contend that higher taxes discourage young people from smoking and cause others to quit.

However, the conservative Tax Foundation points out that even with all the increases in state cigarette taxes in recent years the proportion of Americans who smoke has remained relatively stable at about 20 percent.

The KHPA is recommending that about $69 million in revenue from the increased tax be used to fund expanded health care coverage to low-income Kansans.

Many studies, though, have suggested that cigarette taxes fall disproportionately on the low-income people for whom expanded health care coverage would be provided under the KHPA plan..

Critics of cigarette taxes also contend that since cigarette tax revenue generally declines after an increase, as has happened in Kansas, it is poor policy to establish programs that get more expensive every year with a tax source that is declining every year.

The Tax Foundation has indicated in studies that it would be more fair and more sustainable  to fund state health care initiatives with a tax on the general population.

-Phil LaCerte

The Week in Review