Everyone knows that cigarettes are low hanging fruit for state governments to tax. But how much tax is typically embedded in the cost of a pack of cigarettes. Would it surprise you if that amount was 48.5 cents per pack? This figure is not the nationwide average price for a pack of cigarettes. 48.5 cents represents the national average tax increase on a pack of cigarettes, according to TobaccoFreeKids.org. Minimal research need to be performed to show that cigarettes rates are higher than ever. New York has a cigarette tax rate over $4.0 per pack, several other states are more than $3.00 per pack, 15 states, including District of Columbia, have a tax greater than $2.00 per pack, and 32 states have tax rates more than $1.00 per pack. See TobaccoFreeKids.org.
Those figures are astonishing. However, what even is more mindboggling is Alabama. Alabama is not one of the 32 states with a cigarette rate greater than $1.00 per pack. In fact, Alabama has the 48th highest total cigarette tax, currently at 42.5 cents per pack. Effective October 1, 2015, pending passage of the new budget and subsequent approval by the Governor, Alabama’s new cigarette tax will raise the current tax rate to 67.5 cents per pack. That is a 25 cent increase, which is a tax jump of about 59%!
Many other states are also increasing their cigarette tax rate, such as Kansas and Louisiana by 50 cents and Nevada by $1.00. If this is any sense of the direction states are going, soon the entire nation can see even greater increases in the already astronomical cigarette tax rates.
What can we expect on a national scale? All politics aside, in the fiscal year 2016 budget plan, President Obama proposed a federal excise tax on packs of cigarettes increase of 94 cents per pack. Although the increased revenue will fund early childhood education and clearly go to great causes, taxpayers will see an increase in federal tax on a cigarettes from $1.01 per pack to about $1.95 per pack.
If we were to take, for example, a $5.00 pack of cigarettes (note: the national average is roughly $5.50) and apply both the Alabama cigarette tax of 67.5 cents per pack and the federal excise tax of $1.95 per pack, Alabama taxpayers can expect to pay $7.62 per pack of cigarettes. Yes, the increase in tax revenue will likely be put to good use. However, one can’t ignore the glaring issue – will there be a time when simple principles of supply and demand will become so unbalanced that people will stop purchasing cigarettes and move to alternative means?
There will be a time, if it has not already occurred, when customers will start demanding the lowest priced pack of cigarettes. In turn, this could destabilize the pricing premium products and could stir up the entire market. Time will tell as to whether or not this will happen. Regardless of the outcome, taxpayers must embrace the new tax increases and prepare for the road ahead.
About the author: Mr. Donnini is the president and founder of Tobacco Tax Refunds, Inc. He is also multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini has extensive knowledge handling wholesale tax controversy and refunds.
In his law practice Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. Mr. Donnini is licensed to practice law in Florida. If you have any questions please do not hesitate to contact him via email [email protected] or phone at 954-639-4496.