Two Main Reasons Maine's Proposed Tobacco Tax Is Counterproductive

The tobacco tax changes the industry as represented by an unrecognizable person breaking a cigarette in half.

The state of Maine passed its first tobacco legislation law over 100 years ago. Currently, Maine's tobacco tax is considering two bills that are principally targeting tobacco and vape distributors. The first bill-LD 1550- is "An Act to End the Sale of Flavored Tobacco Products". This bill, as the title suggests, aims to completely ban the sale and distribution of flavored tobacco products. This includes flavored cigars, menthol cigarettes, flavored vapes, and electronic cigarettes.

The second bill is called, "Act to Prevent and Reduce Tobacco Use by Ensuring Adequate Funding for Tobacco Use Prevention and Cessation Programs and by Raising the Tax on Tobacco Products and to Provide Funding to Reduce Disparities in Health Outcomes Based on Certain Factors" (LD-1423). Harpswell Rep. Joyce McCreight sponsors this bill before the House of Representatives with the intent to raise taxes on cigarettes. The cost of a pack of cigarettes will double from $2 to $4 effective from November 1, 2021. As expected, doubling taxation of cigarettes will also double the cost of all other tobacco products. As a result, Maine's tobacco industry will suffer some consequences from these two bills. This includes a potential spike in illegal smuggling and a significant decline in revenue.

Increase in Smuggling Activities

The opponents of the two bills, ranging from normal citizens to group lobbyists, foresee an upsurge in illegal smuggling. In this, some are arguing that banning the sale of flavored tobacco products will just force residents to seek other avenues to get their fix. This includes traveling to other states with less stringent laws and seeking out black markets. This will cause a domino effect of criminal-related activities further burdening law enforcement. It will not take much push for people to run to the neighboring Hampshire state either, which has a much lower tobacco tax of $1.78 per pack.

In retrospect, illegal activities in tobacco products do more harm to the legitimate tobacco supply chain. Take, for instance, distributors; demand for their products is majorly important to sustain business operations. Now, if the bills become law, they lose a chunk of their customers and their legitimate products lose to subpar and harmful tobacco products. Christopher Jackson, who is lobbying for the Cigar Association of America, points out that lawmakers are showing double standards towards tobacco dealers even as the marijuana industry continues to gain more influence with its varied products.

The Decline in Revenue for Maine's Tobacco Industry

The lawmakers are also dismissing the expected loss in revenue. In 2020, Maine was ranked as the 17th state in cigarette tax at $2 per pack, according to the Truth Initiative reports. This move by the government seems self-destructive. Tobacco businesses may close down shortly due to unattainable tax obligations. By way of law, tobacco products are subject to an excise tax of 43% of the wholesale costs and soon this rate will double. If the wholesale price increases, distributors will have to pass the burden on customers to make any reasonable profits. Nothing will stop customers from looking for cheaper and likely more harmful alternatives.

In principle, the Maine tobacco industry contributes millions in tax revenue and tobacco settlement payments to which the state allocates to its tobacco control programs. Thus, both banning and doubling taxes will not support the state's goal to reduce harm but will instead perpetuate it. For this reason, the state should work together with tobacco industry players to encourage the consumption of safe products. Owing to this, tobacco revenues will not plummet, protecting more jobs and promoting economic growth.

Learn More About the New Tobacco Tax

As a distributor, you must be privy to the ever-changing regulations and tax policies in the tobacco industry. As a tax consulting firm, we understand how easy it is to get lost in all the complexity. If you have concerns and questions about how these two bills as well as other tobacco laws will affect you, please do not hesitate to contact us.