Ohio House
House Ways and Means Committee
Testimony of
Patrick Fleenor
Regarding House Bill 64
Mister Chairman and Members of the Committee, thank you for the opportunity to speak
today.
My name is Patrick Fleenor, and I am here today on behalf of Altria Client Services, Inc. and their
affiliates, Philip Morris USA, United States Smokeless Tobacco Company, John Middleton
Company, and Nu Mark, to offer testimony on the tobacco tax provisions of House Bill 64.
Before I delve into the content of this bill, I think it would first be appropriate to provide the
Committee with a brief summary of the knowledge and experience that form the basis of the
comments and opinions that I have prepared to offer the Committee.
I am Chief Economist of Fiscal Economics, Inc., a Washington-based consulting firm specializing
in the economics of taxation. My experience also includes 7 years as Chief Economist of the Tax
Foundation, a national public policy organization. I also served as a Senior Economist with the
Joint Economic Committee of the United States Congress where I advised lawmakers in both
the House and Senate on a broad range of federal tax policy issues. In these roles, I have
conducted research on a wide range of federal, state and local tax and budget issues, including
the adverse effects of excessive tobacco taxes. I have examined the effects of high tobacco
taxes nationally as well as in states and localities for a variety of clients and provided analysis
and commentary that has appeared in leading publications including the Wall Street Journal,
Boston Globe, Chicago Tribune, Los Angeles Times, and Christian Science Monitor.
Information provided by Altria Client Services Inc. on behalf of Philip Morris USA Inc.
For more information please visit www.pmusa.com
As of 3.4.15 | 1
House Bill 64 contains numerous problematic provisions related to tobacco taxes. In this
testimony, I would like to address the proposed tobacco tax increases, as well as the
problematic promotional restrictions, including a ban on coupons.
I begin my remarks by reminding the Committee that effective April 1 of 2009, the federal
excise tax on cigarettes increased by approximately $0.61 per pack. Currently, the total excise
tax, state and federal, on a pack of cigarettes in Ohio is $2.26. I ask Committee Members to
keep this in mind as I discuss several reasons it should not approve the proposed $1.00 increase
in Ohio’s cigarette tax rate.
First, recent experience has shown that raising taxes on tobacco products can be an
unpredictable proposition. Over the years, states across the country have resorted to a tax
increase on tobacco only to see revenues fall well short of their projections. In three cases –
New Jersey, D.C., and Hawaii – cigarette tax increases actually caused tax revenues to decline.1
A second factor to ponder when considering a cigarette tax increase is the impact such a tax
could have on smuggling and associated crime. John D’Angelo of the Bureau of Alcohol,
Tobacco, Firearms and Explosives, has stated “There is no doubt that there’s a direct
relationship between the increase in a state’s tax and an increase in illegal trafficking.”2 A tax
increase could contribute to increased incentives for smuggling and other contraband activities.
This may include buying tobacco products in other states and jurisdictions, on Native American
reservations, over the Internet or at other similar venues, where taxes may not be collected at
all.
If passed, the proposed cigarette excise tax will cause packs of cigarettes to be much more
expensive in Ohio when compared to its neighbors. The current tax per pack in Ohio is $1.25. If
a $1.00 per pack increase in the state cigarette excise tax were implemented, the tax would
jump to $2.25 per pack. Such a tax would exceed all of its neighboring states, especially those
1
2
Bill Orzechowski & Rob Walker, The Tax Burden on Tobacco, vol. 49 (February 2015); funded in part by Altria Client Services Inc.
Maria Schultz, Raised Tax on Smokes May Stoke Illicit Sales, DETROIT NEWS, (July 21, 2002).
Information provided by Altria Client Services Inc. on behalf of Philip Morris USA Inc.
For more information please visit www.pmusa.com
As of 3.4.15 | 2
neighbors to the South, including Kentucky, at $0.60 per pack and West Virginia, at $0.55 per
pack.3 The resulting per pack tax difference between Ohio and its neighbors will provide
incentives for adult smokers to cross the border to buy cigarettes in states with lower excise
taxes.
In the past, Ohio has had severe problems with illegal trade and border-shopping during
periods of high taxation. These began shortly after a 2 cent per pack tax (about 31 cents in
today’s money) was instituted in 1931 and persisted until inflation effectively cut it in half by
the mid-1950s.4 They reemerged in the late-1960s and 1970s when a series of large hikes
pushed the tax to record levels. The resulting border activity caused taxed cigarette sales to
plummet and a major federal report on cigarette tax evasion described the situation in Ohio
during this period as ‘serious’ and amongst the worst in the country.5 These problems
tempered lawmakers’ enthusiasm for any additional hikes and by the mid-1980s inflation had
once again effectively lowered the tax and significantly reduced the state’s problems with
border activity.
These problems have not gone away, however. Researchers at the Mackinac Center and Tax
Foundation have used a sophisticated econometric model to examine the current situation in
Ohio and forecast the likely effects of a $1.00 cigarette tax hike.6 The results are troubling.
They found that under current law approximately 7 percent of the cigarettes consumed in the
state evade the tax. They predict that this figure would rise to 22 percent under the proposed
tax hike, costing the state hundreds of millions annually in lost revenue.
3
Bill Orzechowski & Rob Walker, The Tax Burden on Tobacco, vol. 49 (February 2015); funded in part by Altria Client Services Inc.
For a discussion of the state’s evasion problems following the implementation of the tax see presentation of Quincy A. Davis, Vice Chairman of
the Tax Commission of Ohio, in Report of the Proceeding of the Sixth Annual Conference of Administrators of Tobacco Tax Laws, (Chicago:
Federation of Tax Administrators, 1932), pp. 20-35. Also see Miscellaneous Tax Evasion Problems – A Symposium in Proceeding of the TwentyFourth Annual Meeting of the National Tobacco Tax Association, (Chicago: Federation of Tax Administrators, 1950), pp. 12-15.
5
Cigarette Bootlegging: A State AND Federal Responsibility (Washington: Advisory Commission on Intergovernmental Relations, 1977), p. 30.
6
Todd Nesbitt, “Proposed Increase in Cigarette Tax is Too High,” Columbus Dispatch, February 11, 2015. Document may be accessed at
http://www.dispatch.com/content/stories/editorials/2015/02/11/1-proposed-increase-in-cigarette-tax-is-too-high.html
4
Information provided by Altria Client Services Inc. on behalf of Philip Morris USA Inc.
For more information please visit www.pmusa.com
As of 3.4.15 | 3
A third factor to think about when considering a tobacco tax increase is that tax hikes on
tobacco products work against small businesses that rely heavily on tobacco sales to stay afloat.
Cigarette sales are an important source of revenue for many of Ohio’s approximately 12,040
retailers.7 According to the National Association of Convenience Stores, cigarette sales account
for 31.8% of all in-store sales at convenience stores nationwide.8
It is known that cigarette excise taxes currently provide a significant source of revenue for Ohio.
In fiscal year 2014, the sale of cigarettes in Ohio generated more than $750 million in state
excise taxes.9 This is in addition to the payments Ohio received under the tobacco settlement
agreement. 2014 settlement payments were about $330 million.10 PM USA believes that adult
smokers in Ohio already pay a fair amount of taxes on the cigarettes they purchase. The
adverse economic impact this proposal would have on adult Ohio smokers is another reason
the cigarette excise tax should not be raised.
The Ohio adult who purchases one pack per day already pays $1,220 per year to the federal and
state government.11 This is on top of the other taxes that a typical household may pay,
including: income taxes, social security taxes, excise taxes on other products (such as gasoline),
and property taxes. Including the proposed $1.00 cigarette excise tax increase, the total
government costs imposed on cigarettes could increase to as high as $1,615 per year for an
adult purchasing one pack per day.12
Should the proposed $1.00 cigarette excise tax increase be enacted, adult smokers would be
paying $4.43 in government revenue for a pack of cigarettes in Ohio, which would then account
for approximately 60% of the total cost for a pack of cigarettes.13 The large share of cigarette
7
Retail locations based on internal PMUSA data and rounded to nearest 10.
State of the Industry: Convenience Store Totals, Trends & Averages, NATIONAL ASSOCIATION OF CONVENIENCE STORES, 2009.
9
Bill Orzechowski & Rob Walker, The Tax Burden on Tobacco, vol. 49 (February 2015); funded in part by Altria Client Services Inc.
10
Campaign for Tobacco Free Kids, "ACTUAL TOBACCO SETTLEMENT PAYMENTS RECEIVED BY THE STATES, 2002-2010
11
This includes the state excise tax and federal excise tax paid by a pack a day smoker per year based on information from Bill
Orzechowski & Rob Walker, The Tax Burden on Tobacco, vol. 49 (February 2015); funded in part by Altria Client Services Inc.
12
This includes the state excise tax and federal excise tax paid by a pack a day smoker per year based on information from Bill
Orzechowski & Rob Walker, The Tax Burden on Tobacco, vol. 49 (February 2015); funded in part by Altria Client Services Inc.
13
The existing excise taxes can be found in, Bill Orzechowski & Rob Walker, The Tax Burden on Tobacco, vol. 49 (February 2015); funded in part
by Altria Client Services Inc. Product costs are estimated based on prices and taxes from Bill Orzechowski & Rob Walker, The Tax Burden on
8
Information provided by Altria Client Services Inc. on behalf of Philip Morris USA Inc.
For more information please visit www.pmusa.com
As of 3.4.15 | 4
revenues the government already receives should be strongly considered before any further tax
increase is implemented.
Moreover, cigarette excise taxes are unfair and regressive, impacting lower-income adult
smokers more than high-income adult smokers. This is because the taxes are placed on the
product and not based on income level. Increasing the cigarette excise tax will
disproportionately burden lower income households.
Currently, Ohio taxes other tobacco products (OTP) at a rate of 17% of the wholesale price. If
this bill were to pass, the tax on OTP would increase to 60% of the wholesale price – a 250%
increase. A 60% OTP rate in Ohio would be significantly higher than the tax imposed by all five
of its’ neighboring states. As such, it is possible that Ohio could see a sharp rise in cross-border
sales and the illicit trade of tobacco within its borders.
House Bill 64 also imposes a new tax on vapor products, at a rate equal to that of the cigarette
tax rate. Taxing e-vapor products is misguided. First, e-vapor products may present a
compelling harm reduction opportunity compared to combustible cigarettes and tax policy
should not dissuade adult consumers from migrating to an alternative product.
In fact, Mitch Zeller, the Director of the Center for Tobacco Products at FDA, has recognized the
promise tobacco harm reduction and potentially reduced risk products may hold for public
health. He has publically stated,
“If we look at a subset of smokers who are otherwise unable or unwilling to quit, they're
going to continue to smoke that pack of cigarettes. Half of them will die prematurely
later in life from that decision. If we could get all of those people to completely switch
all of their cigarettes to one of these non-combustible products, that would be good
Tobacco, vol. 49 (February 2015); funded in part by Altria Client Services Inc. The estimated settlement cost per pack and the estimated quota
buyout payment are from PM USA internal data. The FDA user fee revenues are estimated based on total FDA user fee revenues and total
national and state tax-paid sales. The estimated trade markup is based on data from: NACS State of the Industry Report – 2013, National
Association of Convenience Stores, 27th Edition, Table 9A. Actual retail prices will vary. Numbers may not add due to rounding.
Information provided by Altria Client Services Inc. on behalf of Philip Morris USA Inc.
For more information please visit www.pmusa.com
As of 3.4.15 | 5
for public health.”14
Applying an excise tax to e-vapor products contradicts the harm reduction opportunity that
these potentially reduced risk products could present Congress empowered FDA to implement
science-and-evidence-based regulation to ensure that adult consumers have access to, and
accurate information about innovative tobacco products. FDA is working to finalize a rule that
extends its comprehensive regulatory authority to include e-vapor products that may influence
state tax policy.15 States should give the FDA an opportunity to implement the U.S. Congress’
mandate to develop and implement a national tobacco policy at the federal level.
Further, e-vapor products should not be taxed because the e-vapor market is in its early days
and should not be discouraged through excessive taxation.
The e-vapor market remains relatively small especially compared to the overall tobacco
market.16 States should not view this category as a significant revenue source.
Finally, Ohio may not have adequate infrastructure to implement and enforce an e-vapor tax.
For example, not all e-vapor products go through a traditional wholesale distributor system,
where a tax would be collected. This proposed legislation might incent significant loopholes for
tax evasion.
Until there is a better understanding of the e-vapor category, governments should not rush to
action that could stifle innovation and suppress adult consumer interest in potentially reduced
risk products.
Now I’d like to turn to the problematic promotional restrictions in this proposed legislation. It
14
Source: U.S. Senate HELP Committee Hearing “Progress and Challenges: The State of Tobacco Use and Regulation in the U.S., May 15, 2014,
http://www.help.senate.gov/hearings/hearing/?id=a0a14829-5056-a032-526d-3bc1bfd96586 (emphasis added)
15
See FDA, “Deeming Tobacco Products to be Subject to the Federal Food, Drug, and Cosmetic Act, Regulations on the Sale and Distribution of
Tobacco Products and Required Warning Statements for Tobacco Products,” 79 Fed. Reg. 23,142 (April 25, 2014)
16
ALCS estimates, see http://investor.altria.com/phoenix.zhtml?src=leftnav&c=80855&p=irol-quarterlyearnings (e-vapor revenues est. 2014;
total tobacco revenues est. 2013)
Information provided by Altria Client Services Inc. on behalf of Philip Morris USA Inc.
For more information please visit www.pmusa.com
As of 3.4.15 | 6
is unfair to prevent retailers from effectively competing with other retailers based on price.
This proposal would harm local businesses as adult smokers would seek other venues to make
their purchases, such as across state lines. Such action would also make the legitimate
cigarettes sold in the distribution chain more expensive, potentially fueling a black market in
illegal or unregulated sales.
Done correctly, reform of Ohio’s tax system could improve both the state’s economic
performance and fiscal fairness. Hiking the cigarette tax by $1.00 per pack, however, would be
a step backward on both of these fronts. Such a hike will send both adult consumers and the
businesses who serve them across the state’s borders. The resulting decline in business activity
within the state will lower income, property, sales, and excise tax revenue. It will also
significantly raise the tax burden of low income residents of Ohio, harming equity. Moreover, a
large tax hike will increase the state’s problems with illegal trade and drive up enforcement
costs.
For all of these reasons, please vote against this proposed tax increase.
Thank you for your time.
Information provided by Altria Client Services Inc. on behalf of Philip Morris USA Inc.
For more information please visit www.pmusa.com
As of 3.4.15 | 7