LANSING, Mich. -- The proposed 25-cent tax hike to Michigan's $2-per-pack cigarette tax could have some negative consequences for the state including increased crime, millions in lost sales for Michigan retailers and will target Michigan's low-income residents, according to a new study released by the Michigan Petroleum Association/Michigan Association of Convenience Stores (MPA/MACS).
"Slapping another 25 cents on cigarettes will put Michigan one step closer to New Jersey's situation, where the tax is so high they lose tens of millions of dollars in revenue every year from people simply driving to neighboring states; there is definitely a tobacco tax tipping point" said Mark Griffin, president of the MPA. "Whatever revenue lawmakers think this tax hike will bring the state is highly inflated. A tax increase will likely be a lose-lose for retailers and the state."
Griffin said he sought the expertise of Western Michigan University economists Dr. Donald L. Alexander & Dr. William Kern along with William D. Keip, president of Keip Government Solutions, to review the impact of an increase in Michigan's cigarette excise tax.
Findings include:
Cigarette excise taxes are an unreliable, declining and unstable funding source. Last year, New Jersey became the first state to see an actual reduction in cigarette tax revenues in the same year the tax rate increased. In fiscal year 2007, the year the tax rate was increased, the cigarette tax raised $22 million less than the previous year. Conventional wisdom was proven wrong: A tax increase doesn't result inevitably in a revenue gain.
Michigan smokers have options when purchasing cigarettes: Border sales, the Internet, military bases, Indian reservations and through Michigan's black market—smuggling and counterfeiting operations.
A 25-cent increase in Michigan's current cigarette excise tax of $2 will likely decrease the number of legal cigarette packs sold by 15.9 million.
A 25-cent increase in Michigan's current cigarette excise tax of $2 will likely result in a $6,375,267 total loss—an average of $1,316 per store—in profits for Michigan c-stores.
The result of tax hikes are dollars being diverted from government and legitimate businesses to criminals. Big-time profiteers and small-time cheaters are smuggling 7 million cartons of cigarettes into the state annually to evade Michigan's high cigarette taxes, costing the state about $140 million a year.
Cigarette excise taxes target low-income consumers and are regressive. Such taxes single out those least able to afford to pay. Almost 29% of adults with income of less than $15,000 are smokers.
"The state's fiscal problems will not be solved with tax hikes that attempt to balance the state budget on the backs of small business and those who smoke," said Jim Holcomb, vice president of business advocacy for the Michigan Chamber of Commerce. "Michigan families and job providers cannot afford any tax hikes right now—especially a tax hike that has been proven to be regressive, unreliable and target low-income residents."
The study also highlighted Michigan's current smuggling and counterfeiting problem, which is expected to worsen if the proposed 25-cent increase is added to the state's $2-per-pack tax, which ranks in the top 10 in the nation. Michigan smokers can already travel to Indiana and Ohio to obtain lower taxed cigarettes (99 cents and $1.25, respectively).
"It's an indisputable fact that higher cigarette prices result in increased crime, particularity through smuggling and counterfeiting operations," said Keip. "With attractive lower tax states like Indiana and Ohio, another tax increase will just mean millions of more dollars being diverted from government and legitimate businesses to criminals."
Added Kern, "The study reveals several of the negative consequences associated with raising Michigan's excise tax on cigarettes. Our intention is to make legislators better aware of some of the difficulties associated with continued reliance on cigarette taxes as a revenue source."
The Michigan Petroleum Association (MPA) has been serving the state's independent petroleum marketers since 1934. The Michigan Association of Convenience Stores (MACS) was established by MPA in 1986 to serve the interests of the state's c-store industry.
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"The state's fiscal problems will not be solved with tax hikes that attempt to balance the state budget on the backs of small business and those who smoke," said Jim Holcomb, vice president of business advocacy for the Michigan Chamber of Commerce. "Michigan families and job providers cannot afford any tax hikes right now—especially a tax hike that has been proven to be regressive, unreliable and target low-income residents."