Will State Budgets Be Ready for Cigarette Free World

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A world without cigarettes? It could happen. In fact, it’s the stated goal of both anti-smoking organisations and one of the world’s biggest tobacco companies.

But a world without cigarette taxes? Now that’s a world many state governments aren’t ready for quite yet.

Last year,  Philip Morris International CEO André Calantzopoulos told a Boston audience: “We are trying to achieve a smoke-free world.”

It’s a message that resonates with Chris Bostic, deputy director for Action for Smoking & Health — a group dedicated to the elimination of cigarettes.

“We have a project called Project Sunset, which is to phase out the sale of combustible tobacco,” Bostic told Inside Sources. “It’s all about sale, not about use or possession — so it’s just about the activity of the tobacco companies, not that of the smokers.

“We’re a public health organisation, and we want to minimise disease and death,” he said. “And the best way to do that — the biggest cause of preventable deaths in the world — is smoking.”

The new trend is away from traditional tobacco products, known as “combustible cigarettes” in the industry, and toward new technologies like vaping or “heated tobacco” products. These new technologies can reduce exposure to harmful chemicals from smoking by 90 percent or more.

In fact, the rise of these new products is so widespread, they’re beginning to have an impact on the state revenues.

“Tobacco taxes comprised an average of close to two percent of state tax collections,” Ulrik Boesen, senior policy analyst on excise taxes with the Centre for State Tax Policy at the Tax Foundation told Inside Sources, “and there are more and more harm-reducing products being launched every year.”

“It’s very different from state to state on how they rely on the excise taxes and what that money is allocated for,” Boesen said. “So, if you have a state that funds education with cigarette tax money, they might be in trouble.”

States are also beginning to develop tax policy for the new non-combustible tobacco market.

Federal proposals seek to tax electronic nicotine delivery systems at the same rate as traditional cigarettes, for example setting tax rates based on nicotine content.

In recent years, almost every state and the federal government have increased tobacco taxes. As of July 1, 2019, the average state cigarette tax was $1.81 per pack. But rates vary widely — from 17 cents in Missouri; to $4.35 in New York and Connecticut; and $4.50 in Washington, D.C. Some localities have an additional excise tax on top of the state tax. The federal tax is a little more than $1 a pack.

Twenty-one states currently tax non-combustible nicotine products, but they do so in different ways. At least four states — Connecticut, Kentucky, Utah and Washington — have reduced tax rates on products designated as modified risk tobacco technology.

States might want to look abroad for ideas on solving the revenue issue, says Martin King, CEO of PMI America. “This movie is playing out right now in several countries around the world,” he told Inside Sources.

“In Japan right now, heated tobacco products are about 28 percent of the nicotine market. They have a tax-rate differential between the two, with heated tobacco products taxed at a lower rate. To maintain their total revenue, Japan raised taxes on both combustible cigarettes and heated tobacco, but they kept the gap — which is important in helping people make the switch from combustible cigarettes,” King said.

Boesen was asked whether he thought state governments should expect cigarettes to disappear from store shelves any time soon.

“So you have electronic cigarettes, you have heated tobacco products, you have non-tobacco nicotine pouches… so there are so many options now for smokers than there weren’t there just five years ago,” he said.

“I think there’s a better chance now than there ever was of eliminating cigarettes.”

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