Cigarette tax revenue up, sales down

Posted by:

Robert Bliss, Director of Communication, Department of Revenue

It has been nearly two years since the state excise tax on cigarettes increased by $1 to $2.51 per pack, or $25.10 per carton. Since then, the amount of tax collected has gone up while the sale of cigarettes has gone down.

How much of that decline is due to shrinkage of demand, as opposed to consumers purchasing cigarettes out of state, on the internet or in some other manner, is unknown.

One complicating factor in analyzing the impact of the state cigarette tax increase is that the federal cigarette tax was also raised by 62 cents per pack effective April 2009 in order to fund federal expansion of the State Children's Health Insurance Program (SCHIP).

When combined with the Massachusetts cigarette tax increase, this resulted in a total increase of $1.62. The additional 62 cent federal increase reduced demand for cigarettes, and thus state cigarette tax collections, below what sales would have been had only the $1 state increase been implemented.

In the fiscal year that ended June 30, 2007, cigarette excise tax revenue totaled $419.7 million.

For the fiscal year that ended June 30, 2008, the number was virtually unchanged. Demand and revenue held steady.

The excise tax increase on cigarettes took effect July 2, 2008, at the very beginning of the 2009 fiscal year. As a result of the increase, excise tax revenue jumped to $569.1 million, an increase of about $150 million.

For the first 10 months of the 2010 fiscal yar, cigarette excise tax revenue is $455.9 million. At the average rate of collection of $45.5 million for each of the first ten months of this fiscal year, FY2010 should finish with collections around $547 million for cigarettes, compared to $569.1 million in FY2009, a decline of about 4 percent.

In these same time periods, number of packs of cigarettes sold has gone from 278 million in FY2007 to 277.6 million packs in FY2008 to 243.5 million packs in FY2009, a decline in sales of roughly 12 percent.

For the current fiscal year, through the end of April, DOR estimates 181.6 million packs sold, which, on  per month basis, suggests that about 217 million packs will be sold this fiscal year, which would be a decline of about 11 percent from the previous year, and a drop of about 22 percent compared to the year before the tax was increased.

This decline in sales is about as predicted by economic theory given the cigarette price increase resulting from the higher state and federal cigarette taxes.

For a 50-state chart of cigarette tax rates (and other sales and liquor tax rates as well) from the Tax Foundation click here.  

Comments

[Robert Bliss]

John,
Without looking at the sales slip, my guess is that the 50-cents is sales tax, which indeed would be charged on a pack of cigarettes at the rate of 6.25 percent, which, on a pack that lists for $7.99, would add up to an additional 50-cents.

[John Crittenden]

Could you explain why Stop and Shop on Southern Artery in Quincy, MA is adding 50 cents on top of the $7.99 list price to a pack of cigarettes?

Please do respond I suspect this is illegal.