Increasing cigarette taxes doesn’t make sense
Last month, the Nebraska legislature considered a series of tax reforms, including a bill that would raise the cigarette tax by a whopping 132% — but that idea could go up in smoke.
State lawmakers are eager to put property taxes on the chopping block this year, but in order to do that, they’ll need to find another way for the government to generate revenue. Governor Jim Pillen wants to increase both cigarette taxes and sales taxes across the board. But the proposal is wildly unpopular. According to a new poll from Americans for Prosperity, “70% of Nebraskans oppose raising the sales tax as a trade to provide property tax relief” while only 14% support it.
While there are many good reforms currently under consideration in the Legislature, Nebraskans are right to reject higher sales taxes. The cigarette tax increase is especially egregious. Not only would the tax hike disproportionately harm lower-income Nebraskans (who are more likely to purchase cigarettes), it’s also fiscally unwise. Dramatically raising cigarette taxes will incentivize folks to either buy cigarettes that have been smuggled in or cross the state border themselves to purchase them. As such, it fails to provide a good revenue substitute for property taxes, which are less easily evaded.
That’s not to say that comprehensive tax reform isn’t sorely needed. As real estate values soared over the past few years, so have property taxes. Since the beginning of 2020, home prices in Nebraska have gone up nearly 39%, according to Zillow. Naturally, property assessments went up as well and county coffers have ballooned. In 2022, Nebraskans paid over $5 billion in property taxes. Governor Pillen recently said that he’d like to see that number fall to $3 billion.
To make up for lost revenue, Pillen suggested raising the cigarette excise, which the Legislature is now considering. The proposed tax increase is huge: an additional $1.50 per pack, for a total per pack excise of $2.14. This would catapult Nebraska, which currently has a very low cigarette tax, to the highest in the country. Such a dramatic increase is bound to have significant effects.
First and foremost, raising cigarette taxes would disproportionately burden low-income individuals and exacerbate existing socioeconomic inequalities. Research consistently shows that cigarette taxes are regressive, meaning they take a larger percentage of income from low-income individuals, who are more likely to smoke than higher income earners. By targeting a behavior that is more prevalent among marginalized communities, this policy further impoverishes those who are already struggling to make ends meet.
Senator Machaela Cavanaugh, who first introduced the cigarette tax bill last year, hopes that higher cigarette taxes will actually help lower-income smokers by incentivizing them to give up the unhealthy habit. But this could wind up counteracting the goal of recouping lost revenue from lower property taxes. The problem is obvious: if sales go down, then the higher excise may not be sufficient to bring in the expected revenue.
The consumers who aren’t induced by the higher tax to quit smoking will almost certainly seek out cheaper alternatives. In neighboring states with lower cigarette taxes, such as Iowa and Kansas, consumers who live close enough to these states’ borders may be incentivized to purchase cigarettes there, leading to revenue loss for both Nebraska’s businesses and government.
Entrepreneurial sellers will also likely smuggle cigarettes into the state and sell them illegally to avoid the excise. Data from across the country shows that smuggling is positively correlated with tax rates. Because of these issues, Adam Hoffer, the Director of Excise Tax Policy at the Tax Foundation concludes that cigarette tax revenue is too unstable to be a reliable source of government funding.
Raising taxes on cigarettes in Nebraska is not the answer to the state’s fiscal challenges. Instead, policymakers should focus on reducing government spending, while simultaneously limiting the growth of property taxes by imposing levy limits, which automatically reduce the tax rate as property valuations rise. Doing so will provide Nebraskans will much needed tax relief without shifting the fiscal burden to more volatile, economically regressive, and unpopular sales taxes.
Tyler Curtis is a contributor at Young Voices and works as a loan officer at a Missouri bank.
