How A Tobacco Tax Increase Would Negatively Impact South Carolina

Another Year, Another Tax Hike Proposal: How A Tobacco Tax Increase Would Negatively Impact South Carolina

Tax and spend advocates have long argued that South Carolina needs to increase its sales tax on tobacco. For years their rationale was that South Carolina needed the extra tax revenue to provide a quick fix solution to the states Medicaid crisis while not offering any substantive solution to solving the problems with the fiscally out-of-control welfare program. Now the pro-tax crowd is pushing for the tax hike again and have rallied around an ironic new message: South Carolinas tobacco tax should be increased because its the lowest in the nation.

While a tax increase might provide a temporary quick fix for the states over burdened healthcare system, the data clearly shows the long term effects of a tax increase would be detrimental to the states economy and to small business owners. As cigarette taxes are raised the beneficial result is that some will quit smoking. The economic reality, however, is that state tax revenues will have a net decline. Especially hard hit would be the 5,000 retail and wholesale employees whose jobs are sustained by cigarette sales. Any attempt to increase cigarette taxes would financially burden those South Carolina workers and will substantially impact our states economy.

What Do South Carolina Smokers Already Contribute To the State’s Economy?

  • In 2005, the 24 percent of adults who comprise South Carolina’s smoker population paid taxes with serious impact on our state revenues.
  • In 2005, smokers paid South Carolina $27,559,820 in Excise Taxes, $63,106,000 in Sales Taxes, $73,400,000 in Tobacco Settlement Payments for a total of $164,065,820 paid.
  • In 2005 the average South Carolina smoker paid $125 in Excise and Sales Taxes and $101 for the Tobacco Settlement.
  • The total smoker cigarette payment to South Carolina in Fiscal Year 2005 was $164,065,820 that works out to $449,188 per day, $18,716 per hour, $312 per minute and $5 per second.

A 28 Cents Per Pack Cigarette Tax Hike Would Hit South Carolina Retailers Hard

South Carolina stores sold approximately 394 million packs of cigarettes in Fiscal Year 2005, with a gross retail value of about $1.2 billion. South Carolina merchants earned over $214 million in gross profits on these sales.

According to a study by the American Economics Group (AEG), nearly 5,000 South Carolina retailer and wholesaler jobs were supported by in-state tobacco sales.

Over 57 percent of all tobacco sales occur in the nations 138,205 convenience stores, according to a 2005 National Association of Convenience Stores (NACS) study. The average convenience store sells about $365,000 worth of cigarettes and other tobacco products each year.

South Carolinas 3,080 convenience stores sold an estimated $707 million worth of cigarettes, with gross profits of nearly $127 million in FY 2005.

Cigarette tax hikes cause consumers to go Online, where they can often avoid their own states tax. NACS estimated that $5 billion of cigarette sales took place over the Internet in 2005, up from $750 million in 2001. South Carolina merchants would lose their competitive edge in the region along with becoming more vulnerable to the Internet. A South Carolina tax hike would also choke off the gain in cigarette sales that is likely to occur in FY 2006 due to North Carolinas decision to raise its cigarette tax from 5 cents to 30 cents per pack. At 7 cents per pack South Carolina would hold an important tax advantage over North Carolina in the lucrative cross border market.

What are the Commercial Losses due to a 28 Cents Tax Increase?

In Fiscal Year 2004 South Carolina realized 92 packs purchased per capita. This was about 41 percent greater than national tax-paid per capita sales of 65.1 packs. This indicates that South Carolina merchants sell a significant amount of cigarettes to consumers in states with higher cigarette taxes. After a 25 cents North Carolina tax hike, South Carolina would hold the strategic advantage if it refrains from a tax hike. Many North Carolinians and shoppers from high tax states would likely shift their buying patterns in favor of South Carolina in FY 2006.

It is projected that South Carolina could see about a 7 percent expansion in cigarettes tax revenue if South Carolina avoids a tax hike. This certainly would not be unusual. For example, South Carolina tax revenues increased by over 15 percent in the mid 1990s in response to big tax increases in Northern States.

It is projected that increasing the South Carolina cigarette tax from 7cents to 35 cents per pack would reduce South Carolinas cigarette sales by about 13 percent in FY 2007. Cigarette volume is likely to fall by about 56 million packs in FY 2007. Most of this would be due to lost sales to other low tax states or the Internet.

The gross retail value of lost cigarette sales is estimated at approximately $174 million (56 million packs evaluated at a retail price of $3.12 per pack). Sundry product sales, or products normally bought in conjunction with tobacco products, would fall by about $50 million (based on past estimates of this phenomenon by Price Waterhouse).

Gross profits lost to South Carolina retailers and wholesalers would be about $40 million from the loss of cigarette and sundry product sales.

South Carolina convenience stores would see their cigarette volume fall by about 33 million packs. Gross profit losses would average about $8,000 per store. This means each store would have to boost gross retail sales of other items by $43,000 to make up for the damage wrought by the tax hikes.

It is estimated that nearly 550 South Carolina retailer and wholesaler jobs could be displaced due to the 28 cents tax increase (based on projected gross profit losses).

 

Conclusion: Serious tax policy cannot occur without a broad understanding of behaviors and its impact on tax revenues.

History has shown that seemingly minor changes in cigarette taxes among the tobacco states have led to relatively big shifts in cigarette volume. In 1950, South Carolina increased its tax from 3 cents to 5 cents per pack and lost about 19 percent of its tax-paid sales. North Carolina, with no cigarette tax at the time, saw its sales jump by 20 percent. The next year, South Carolina reduced its tax by 2 cents and saw its sales climb by 23 percent The Raleigh News and Observer reported, South Carolina saw how well it was going in North Carolina and they went for a piece of the pie.

South Carolina can learn from this critical lesson. Any increase of the cigarette tax will likely lead to a beneficial health impact of people quitting smoking as well as a substantial reduction in sales for the states wholesalers and retailers, as South Carolina hands a robust business away to other tobacco states, Indian reservations and the Internet. And we must understand that South Carolina smokers can and will turn to other means to purchase tobacco products because of higher taxes and as a result tax revenues will ultimately decrease even with the tax hike. Any attempt to raise the tobacco tax would negatively impact retailers and South Carolina’s economy.

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