July 23, 2007
Cigarette sales down for now

The effect of the dollar-a-pack increase in the cigarette tax has been more or less as expected, but it's still early to say what trends may exist.

The state sold about 484,000 tax stamps, which must be affixed to every pack, during the first half of 2007. During the same period last year, about 620,000 stamps were sold.

As expected, revenue from the tobacco tax has nearly tripled. It brought $727.3 million into state coffers compared with $242.8 million in the first half of 2006.

"Everything we predicted would happen is happening. Consumption has gone down as expected, and, just as importantly, significant new revenue has been generated to fund property tax relief," said James Gray with the Austin office of the American Cancer Society.

Gray said the key benefit to making it more expensive to smoke won't show up in the current numbers.

"This is all about stopping kids from ever starting to smoke," he said. "Based on that dollar increase, we will stop 280,000 kids alive today from ever starting."

But tax revenue, which grew at a greater pace in the second quarter, shows that some smokers could be adjusting to the sticker shock.

"The price isn't scaring people away the way they thought it might," said Dick Lavine, a tax analyst with the Center for Public Policy Priorities. "It shows how addictive cigarettes are."

Doug DuBois with the Texas Petroleum Marketers and Convenience Store Association said a survey of member stores showed cigarette sales down about 15 percent.


Tax analysts say it's difficult to measure the initial effect of tax hikes on people's habits because so many smokers stock up in advance of an increase. Sales were up 27 percent in the last quarter of 2006, said Dale Craymer, chief economist with Texas Taxpayers and Research Association, a business group that tracks state tax policy.

"It's really hard to get a handle on what the hit on consumption is going to be immediately after the tax hike takes effect precisely because folks tend to have stockpiled," Craymer said. "Over a longer period of time, we'll tend to see fewer smokers or smokers smoking less."

Here's how things looked three months ago. No question people stocked up, but surely that effect didn't last beyond the first quarter. The real question is how much of the decline is attributable to people quitting or cutting back, and how much is due to non-Texas sales.

Other explanations for the lower sales could be smokers crossing state or even national borders or turning to the Internet to buy cheaper cigarettes. Convenience stores in Louisiana, where the tax is only 36 cents a pack, have done a brisk business since January, and DuBois said stores in the Rio Grande Valley have seen the biggest declines in sales.


Legislative fiscal analysis of the tax hike showed that revenue would grow through fiscal 2009 and then start to slowly decline.

Inspectors with the comptroller's office are watching for sales moving underground.

"We haven't seen much of an increase in illegal cigarette or cigarette stamp sales during our inspections since Jan. 1," said R.J. DeSilva, a spokesman for Comptroller Susan Combs. "But it's something that we continue to keep a close eye on."

Internet sellers are supposed to obtain tax stamps and affix them before shipping cigarettes. The federal Jenkins Act requires the sellers to report to taxing authorities the names and addresses of customers who buy untaxed cigarettes.

Again, no real surprises. The question is what will the Lege do when the tax revenue starts to decline and there's that much more pressure on the funding for the property tax cuts. Hiking the tax again is unlikely to be well received. We'll see.

Posted by Charles Kuffner on July 23, 2007 to Budget ballyhoo