Oregon's Cigarette Tax Collections

A few days ago, I noted that Oregon's cigarette tax was low enough that if Salem raised it another dime, folks probably wouldn't go to much effort to avoid it.  The following article may be proof that I was wrong.

The state tax-collecting agency says it is facing a budget shortfall because it miscalculated how many people would curtail their smoking or buy cigarettes on the Internet to avoid paying taxes.

Revenue Department Director Elizabeth Harchenko said she takes responsibility for the resulting shortfall in cigarette tax revenue, which could mean layoffs for the 950-employee department.

"The Internet problem didn't look like a big one a year and a half or two years ago," Harchenko said.

Some of the revenuers aren't earning their keep? 

The error can also be attributed to lawmakers trying to balance the state budget in 2003, the longest session in Oregon history.

A team of state workers showed they could raise more money by going after smokers, retailers and others trying to escape the state's cigarette tax.

In 2001, the Legislature provided $2.1 million for an 18-person strike force of revenue collectors, state police and prosecutors. The effort netted more than $8 million in added tobacco taxes in 2001-03, Harchenko said.

As lawmakers tried resolve a budget standoff in the 2003 session, they asked the Revenue Department what it could produce if the number of staff members on the strike force was tripled, Harchenko said.

"We all had stars in our eyes. We were ready to put the sunset on the session," said former state Rep. Rob Patridge, R-Medford, a key member of the budget committee in 2003.

Harchenko, with less than two days to produce a number, said a bulked-up strike force could deliver $30 million more in tobacco taxes.

But cigarette taxes for 2003-05 are projected to fall $25 million below the initial target.

How much of that $25 million shortfall is part of the $30 million those new revenuers were supposed to collect?  This article has lots of data, but does a poor job of linking the cause and effect.

Experts predicted that the 60-cents-per-pack cigarette tax increase approved by voters in late 2002 would dent sales in Oregon.  But the reduction in cigarette smoking was larger than expected, Harchenko said.

The department also underestimated the number of people resorting to the Internet. It appears the state is losing up to $20 million or more per biennium from people using the Internet to buy cigarettes, said Randy Evers, administrator of the department's Business Tax Division.

Oregonians buying cigarettes online must pay taxes. But they must take the initiative by downloading a tax form from the Revenue Department.

Fewer than 100 have paid taxes from Internet purchases, Evers said.

Federal law requires online cigarette vendors to provide the states with contact information about purchasers. But it has proved difficult for the state to get them to comply. The largest vendor is based in Switzerland, Evers said.

Cigarette taxes are supposed to influence behavior.  It's working too well, both at getting folks to stop smoking and in persuading people to avoid the tax via the internet.  How does the state estimate the sales it's losing to the internet?

Did the sixty-cents-per-pack tax increase raise the amount of revenue the state has to spend?  If so, the tax was to some degree a success.  But how many times do states have to learn the hard way that if governments raise sin taxes too high, there will be a major downside from folks avoiding them?  At least the internet isn't the black market...we hope in this case. 

Meanwhile, we already knew that trusting people to pay taxes on internet purchases doesn't work.  This non-smoker was surprised that more Oregonians weren't frequenting Indian Reservations to buy their tax-free cigarettes...until I looked up the prices on a Swiss website.  Never mind, except that there is a temporary snafu with the Swiss postal service sending cigarettes to the U.S. and Russia.  A bit more googling showed that our state laws prevent out-of-state vendors from sending cigarettes here, but that limitation doesn't apply to sales from out-of-state Indian Reservations. 

Because the Revenue Department never raised the $30 million, it won't be able to spend $20 million of its $135 million budget for 2003-05. The department expects it will have to begin layoffs early in 2005 as its general fund money runs out, unless it gets $15 million in emergency money.

The Legislative Fiscal Office and state Department of Administrative Services have recommended the Legislative Emergency Board approve $5 million when it meets Thursday and Friday, then another $5 million in January. The 2005 Legislature would be asked to come up with the remaining $5 million.

But it may be a tough sell.

State Sen. Kurt Schrader, D-Canby, the Legislature's top budget expert, said he'll reject the request.

"Then I guess next time they'll come back with more honesty about what they can actually produce with their personnel," he said.

There are too many numbers in this article that don't add up, so let's get more direct.  Those extra revenuers haven't brought in $30 million, but have they brought in more than they cost us in pay, benefits, overhead, etc.?  If so, wouldn't that be good justification for some of that $15 million in emergency funding to keep them on?  That's evidently not the issue for Schrader...thou shalt come up with accurate budget numbers or else!

Maybe that's what it takes to get some in Salem to manage better.  But, where was Schrader's outrage when the Department of Human Services overestimated OHP enrollment and thus costs by $100-120 million?  That supposed shortfall was part of the justification for the tax increase (surtax+) we voted down earlier this year (previous blog here). 

Oh well, maybe Schrader has turned over a new leaf on government accountability.  I sure hope so.  Budget expert or not, it would sure be a novel change if any of our Democratic legislators actually balanced the budget without asking us for a tax increase first.

Comments

[PanchoPdx]

In the '01 session cigar afficianados managed to attach a cap on cigar taxes at 50 cents per stick to the cigarette tax renewal bill. Previously, the tax on cigars had been something along the line of 65% of the wholesale price, causing many fine cigars to carry a four or five dollar tax per cigar. Needless to say, every cigar lover I knew bought over the internet and the state got nothing.

Now that the tax is capped at 50 cents per cigar, more of them are buying locally (at least they regularly sample new brands through local stores before making internet purchases).

The result has been increased cigar tax revenues to the state.

Antismoking activists condemned this as proof that more people are choosing to smoke cigars under the lower tax (therefore leading to more public health problems) rather than acknowledging the diminished effectiveness of using tax policy to control consumer behavior in the Internet Age.

[RoguePundit]

I saw an article yesterday where advocates of the ten cent per pack tax increase said it would raise the state $28 million over the next two years. It would sure be nice if they'd produce the math behind that estimate...how many folks they presume would stop smoking, how many would avoid the tax, etc.