Hey Convenience Store Lobby, don’t look now, but your pants are on fire

Last week the Michigan Petroleum Association and Michigan Association of Convenience Stores released an “Analysis of the Impact of an Increase in the Michigan Cigarette Excise Tax.” It is a “study” filled with incorrect data, out of date research, and numbers cooked up by tobacco funded statisticians. The point of the study was to demonstrate the regressive nature of tobacco taxes, but the researchers failed to extrapolate their data and thus their early arguments tend to focus on the benefits of a tobacco tax increase (like a $165.2 million increase in state revenues).

The researchers used quotes throughout the study to “prove” their points. Quotes from the Heartland Institute (a think tank funded, in part, by Phillip Morris) and Americans for Prosperity (a group that has been underwritten by tobacco companies) permeate the study, using the same type of “slippery slope” arguments made famous by Phillip Morris during the tobacco cases of the 1990s.

In addition some of the statistics used are wildly out of date. TFM counted fourteen errors on the “State Excise Tax Rates and Tax Revenues Sheet” cited in the study. The actual tobacco tax rates varied between $0.07 and $1.00 over what was listed. The study’s claim that Michigan has the sixth highest tax rate is off by four positions and Wisconsin’s cigarette tax rate will exceed Michigan’s by $0.52 on September 1.

Here are the study’s main arguments and faults:

Argument: Cigarette excise taxes are an unreliable, declining, and unstable funding source.
o The Truth: States that have raised their cigarette tax rates have subsequently received more tax revenue than they would have received without a rate increase, despite the fact that cigarette tax increases reduce state smoking levels and despite any related increases in cigarette smuggling or tax evasion. Higher revenues obtained by cigarette tax increases will decline over time as smoking rates continue to go down, but the revenue changes will be gradual and predictable. Moreover, cigarette and overall tobacco tax revenues are more predictable and stable than state income tax or corporate tax revenues, which can decline sharply during recessionary periods.

Argument: Michigan smokers will turn to border sales, Indian reservations, the internet, and counterfeit smuggling operations.
o The Truth: Smuggling and tax evasion account for only a relatively small minority of cigarette sales and do not come close to eliminating revenue gains or making tax increases unproductive.

Argument: A 25-cent increase in Michigan's current cigarette excise tax of $2 will likely result in huge losses to Michigan’s Convenience Store profits.
o The Truth: When c-store owners were asked how their cigarette trends have been relative to excise tax increases, “90% said in line or better than they expected…” Since the federal excise tax increase, industry profits have actually grown for tobacco companies. Reynolds reported an 8.2% increase, Altria reported a 3.8% increase, and Lorillard’s profits increased 21.4%. Consumers didn’t stop consuming, they just switched brands, reported UBS tobacco analyst Nik Modi. Moreover, money spent currently on cigarette sales will not disappear when the smoking declines from a cigarette tax increase reduces cigarette sales, it will simply shift to consumer expenditures on other alternatives.

Argument: Cigarette excise taxes target low-income consumers and are regressive.
o The Truth: Higher smoking rates among lower-income groups means they are now suffering the most from smoking and will, consequently benefit the most from any effective new measures to reduce smoking, including tobacco tax increases. Low-income smokers are much more likely to quit because of state tobacco tax increases than higher-income smokers.

Therefore any state that significantly increases its cigarette tax rate will also end up increasing the portion of the state’s total cigarette tax revenues that are paid for by higher-income smokers and reduce the portion paid by lower-income smokers. It’s also important to note that cigarette companies (and the convenience store lobby) have no problem with levying new charges on low-income smokers when it increases their own profits.

Michigan’s economy is in dire straits. We need a win and tobacco tax increases are that win. The Governor’s proposed tax increase is a win for health, a win for the state budget, and a win with the public. The tax increase would result in reduced youth tobacco use, generation of over $150 Million in new state revenue, and is overwhelmingly supported by Republicans, Democrats, and Independents alike.