Cigarette Tax Increase

Up in Smoke?

Isle smokers soon will pay more
for a pack of cigarettes, but the state
may not get extra tax dollars

By Mike Yuen
Star-Bulletin

During this year's legislative session, there was never any doubt that there would be an increase in the state's 60-cent tax on a 20-count pack of cigarettes. The only question was: How much?

The Senate fought for a significant increase. And when House-Senate negotiations ended, a bill had been crafted that called for a steep two-step increase -- to 80 cents on Sept. 1, and then to $1 on July 1, 1998.

The bill, which Gov. Ben Cayetano is scheduled to sign into law today, may curb the rise in smoking by adolescents as health advocates hope.

But the measure's ability to generate more tax dollars -- roughly $3 million to $5 million annually -- for an increasingly tight state budget may be as short-lived as a puff of smoke, say a leading tax expert and the House tax subcommittee chairman.

That's because a companion bill for identifying, or "stamping," cheaper, tax-exempt cigarettes sold at military bases to prevent black marketeering was killed at the 11th hour by legislative leaders, although conferees wanted the measure approved.

"Without stamping, that took the wind out of the tax increase," says Rep. Nathan Suzuki (D, Moanalua Valley), chairman of the House tax subcommittee, who blames tobacco lobbyists he declined to identify for the bill's death.

G.A. "Red" Morris, a lobbyist for Philip Morris Inc., declined to comment. John Radcliffe, a lobbyist for R.J. Reynolds Tobacco Co., could not be reached.

"We may end up with less revenues," says Lowell Kalapa, executive director of the Tax Foundation of Hawaii. "We'll lose people who quit smoking. And the losses will also be sales migrating to nontax products at military bases."

But the stamping measure, while needed, was flawed, Kalapa asserts, reiterating what he told Senate President Norman Mizuguchi (D, Aiea) the day House and Senate conferees approved the bill.

The measure required cigarette manufacturers to stamp a Hawaii tax-exempt notice on the packs, although the manufacturers are outside of Hawaii and the state has no jurisdiction over out-of-state businesses.

The Legislature, in essence, was trying to require the tobacco companies to take on an additional responsibility without any corresponding benefit, leaving the state open to legal challenges by tobacco giants such as Philip Morris, Kalapa asserts.

The bill would have made more sense by excluding manufacturers and requiring stamping to be done by isle wholesalers or dealers, Kalapa says.

The measure also had no policing provisions to ensure that tax-exempt cigarettes were actually sold to the military, he adds.

Kalapa gave Mizuguchi a nine-page Tax Foundation report, which concludes that there is already "substantial leakage" from isle military bases.

Using data from the Tobacco Institute and a study by the Barents Group, a research organization, the Tax Foundation found that while military sales of cigarettes accounted for nearly 23 percent of the packs sold in Hawaii in 1996, the number of people who have access to post exchanges and commissaries represent only 7.2 percent of the population.

There is a high prevalance of smoking among active-duty military personnel, but that alone doesn't explain why military cigarette purchases are three times the percentage of the isles' military population, Kalapa says.

"Unless they're smoking 24 hours a day, those cigarettes are going somewhere else than the military market," Kalapa asserts.

The $1 a pack state tax will create a greater disparity between taxed and tax-exempt cigarettes, likely causing a greater black market demand for military cigarettes, he says.

A carton of cigarettes is now $6 cheaper at a military commissary. It will be $10 cheaper next year.

"People are going to quit or find other cigarettes at a cheaper price," Kalapa says. "A more moderate rate increase would be preferable if (state cigarette) revenues are to be sustained."

State Tax Director Ray Kamikawa, however, believes that Kalapa is exaggerating the problem of black market sales.

"The leakage issue is not as significant as you would have in a border state where you would have a lower price in a neighboring state," says Kamikawa, noting Hawaii has no contiguous states. "We do have the military presence, which is hard to quantify."

Nor is there a black market problem with isle wholesalers, because tobacco tax audits "have found compliance at a high level," Kamikawa says.

His department's estimate of additional revenue from the cigarette tax hike is conservative and takes into account leakage from the military, and that the increase is meant to discourage youths from smoking, Kamikawa adds.

For House Finance Chairman Calvin Say (D, Palolo), the 10 months that the cigarette tax is increased to 80 cents before it climbs to $1 a pack gives lawmakers to time to see how the tax is curbing adolescent smoking and affecting tax revenues and if it needs modifying.

Rep. Suzuki says he's pondering whether to make another run at instituting a stamping bill to blunt black marketeering in cigarettes.