Tobacco Taxes and Payments for North Carolina

North Carolina's excise tax per pack of cigarettes: $0.050
North Carolina's excise tax collection for the fiscal year ending June 2004: $40,193,000
Sales tax on tobacco products: 4.50%
Tobacco products sales tax collection for the fiscal year ending June 2004: $110,289,000
Local tax on tobacco products: $0
Federal excise tax per pack of cigarettes: $0.39
Total federal excise tax collections in fiscal year 2004: $7,778,569,117
Number of six-packs of beer that must be sold in North Carolina to produce the same state excise tax revenue generated by one carton of cigarettes: 1.7
Number of bottles of wine that must be sold in North Carolina to produce the same state excise tax revenue generated by one carton of cigarettes: 3.2

In 2004, U.S. smokers paid the following amounts in tobacco taxes and MSA payments:
$982.33 per second
$58,939.84 per minute
$3,536,390.60 per hour
$84,873,374.40 per day
$596,153,846.15 per week
$2,583,333,333.33 per month
$31,000,000,000.00 for the year

The above information was obtained from the RJ Reynolds Website
 

Cigarette Taxes

Throughout the 1990s, state budgets grew on average by 63%,¹ significantly outpacing inflation. While the growing economy in recent years caused tax revenues to climb, the economic recession has since slowed revenue gains, causing many states to face budget deficits. Since 2002, more than 30 states have raised cigarette excise taxes, and others are considering raising or further raising excise taxes to help close budget shortfalls. But just as the current economic climate has forced families and businesses across America to take a closer look at their budgets and tighten their belts, governments must do the same. Before turning to another large excise tax increase to fill their budget deficits, policymakers should consider the following:

Cigarette excise tax increases can have unintended consequences. Large increases in excise taxes, and therefore the price of cigarettes purchased in that state, could provide an additional incentive for smokers to seek alternative venues from which to purchase cigarettes, such as Native American territories and the Internet where state excise taxes may be avoided or evaded illegally. Smokers also may travel to adjoining states with lower state and local excise tax rates to purchase cigarettes. Excessive excise tax increases can also lead to increased traffic of contraband cigarettes.

Revenue and Job Loss
These potential changes in purchasing behavior can have several consequences. First, they can cause economic harm and cause a state to collect far less revenue then expected. New York City provides an example of how high excise taxes can lead to significant increases in contraband traffic. New York City saw a decline in taxable sales volume of almost 50% following a $1.42 increase in cigarette excise taxes in 2002.² Even considering the average annual industry decline in cigarette sales of 1%-2% and that some people may have quit smoking or reduced their consumption due to the price increase, this figure suggest that a large number of smokers in New York are purchasing their cigarettes through alternate channels, thereby avoiding or evading taxation.

These trends lead to revenue losses to the state, as well as revenue and job losses to retailers and small businesses. Some researchers have estimated that Internet tobacco sales alone will cost the states $1.4 billion in tax revenue by 2005.³ Other observers believe that the cost to the States could reach $4 billion by 2005.⁴ Small businesses, which are already suffering in this economy, would be particularly hard hit. This is especially true if smokers cross state borders to make their purchases in neighboring states - not only for cigarettes, but for other products as well - or buy cigarettes from other sources, such as Native American territories or the Internet, where taxes are often not collected.

Incentive for Smuggling
Second, this purchasing behavior could create even more of an incentive for organized smuggling from low-tax states to high-tax states. John D'Angelo of the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATFE) was quoted in a July 21, 2002 article saying, "There is no doubt that there's a direct relationship between the increase in a state's tax to an increase in illegal trafficking."⁵ It could also accelerate the growth of imports of counterfeit cigarettes manufactured in China and many other countries around the world. U.S. Customs and Border Protection valued the cigarettes they seized in FY 2003 at $41,720,129. By this calculation cigarettes represented 44% of all commodities seized for violations of intellectual property rights.⁶ By contrast, in FY 2001, U.S. Customs and Border Protection had valued the cigarettes similarly seized at only $4.5 million.⁷

Higher-cost cigarettes create a market for low-cost alternatives, encouraging illegal cigarette smuggling. The U.S. Bureau of Alcohol, Tobacco and Firearms (ATFE) considers illegal cigarette smuggling to be a significant crime problem offering a significant "opportunity to earn illegal profits."⁸ Cigarette smuggling is lucrative and appears to be considered by criminals to be a relatively low risk crime for which penalties are lower than the penalties for smuggling drugs.
Excessive cigarette taxes are unfair to adults that smoke. Tobacco products are already very heavily taxed in the United States. Excessive excise taxes in a state unfairly punish those adults who continue to smoke.

It is not fair for those adults who continue to smoke to address these issues simply by increasing excise taxes excessively. According to the National Conference of State Legislatures (NCSL), "...tax burdens should be explicit, not hidden."⁹ Cigarette excise taxes do not meet these criteria. Additionally, NCSL states "tobacco excise taxes are hidden in the price of a pack of cigarettes or a can of snuff. Although most taxpayers know that tobacco taxes are levied, most probably do not know how much of the price of the tobacco product is the result of the tax and how much they pay in taxes annually. Therefore, tobacco taxes do not score highly on the principle of accountability." ¹⁰

Those who can least afford a tax increase shoulder the burden of excessive cigarette taxes. It is widely held that the fairness of a tax system is based on one's ability to pay. Excessive cigarette taxes disproportionately burden working families.

Raising cigarette excise taxes will not solve systemic state budget problems and could lead to weakened fiscal stability. Cigarette excise tax revenues are sensitive to the overall consumer demand for cigarettes, which has been declining since the mid-1960s. Any new revenue sources considered should be sustainable over the long-term and during economic downturns in order to avoid future deficits. According to the National Conference of State Legislatures, a stable revenue source is one that is broad-based, equitable, and not narrowly targeted at one specific type of economic activity (such as cigarette sales).¹¹ Cigarette excise taxes do not fit these criteria.¹² Recently, New Jersey attempted to securitize a bond with projected cigarette tax revenue. Following this decision, rating agencies substantially downgraded New Jersey's credit rating. The rating agencies said their low marks for the bonds reflect a concern that the money needed to repay the loan will be jeopardized if New Jersey residents either quit smoking in great numbers or avoid state cigarette taxes by purchasing cigarettes out of state or over the Internet.¹³

The government makes more from cigarettes than the cigarette manufacturers do. Adult smokers already pay more than their fair share of cigarette-related taxes. In fact, nearly 60 percent of the cost of an average pack of cigarettes already goes to the government.¹⁴ Currently, the federal government, all 50 states, and 467 cities, towns and counties in 8 states levy a tax on cigarettes.¹⁵ In FY 2003, these taxes raised over $19 billion in revenue.¹⁶ This is in addition to the more than $29 billion Philip Morris USA has paid the states under the Tobacco Settlement Agreements since entering into the agreements in 1997 and 1998 (includes payments made through the end of 2004). Additionally, the MSA alone will provide approximately $200 billion to the states over 25 years, and will continue in perpetuity. We believe government should look to some other source than adult smokers to address governments' fiscal needs.

Footnotes
¹ "Crisis in State Spending - A Guide for State Legislators," American Legislative Exchange Council, 2002.
² Orzechowski and Walker, 2003. This compilation was partially funded by Altria Corporate Services, Inc on behalf of Philip Morris USA. .Information in this compilation was generated by individual states and localities.
³ Online Tobacco Sales Grow, States Lose, Forrester Research, Inc. (April 27, 2001); "Internet Cigarette Sales," U.S. General Accounting Office, August 2002.
⁴ Testimony of Patrick Fleenor, Chief Economist Fiscal Economics Inc., before the Subcommittee on Courts, the Internet and Intellectual Property, Committee on the Judiciary, House of Representatives (May 1, 2003).
⁵ Schulttz, Maria. "Raised Tax on Smokes may Stroke Illicit Sales." Detroit News: July 21, 2002
⁶ http://www.cbp.gov/ImageCache/cgov/content/import/communications_5fto_5ftrade/statistics/iprstats_2epdf/v1/iprstats.pdf (last accessed 4/15/04)
⁷http://www.cbp.gov/ImageCache/cgov/content/import/communications_5fto_5ftrade/statistics/fy01pub_2epdf/v1/fy01pub.pdf (last accessed 4/15/04)
⁸ U.S. General Accounting Office, Terrorist Financing; U.S. Agencies Should Systematically Asses Terrorists' Use of Alternative Funding Mechanisms, GAO-04-163, November, 2003.
⁹ Mackey, Scott. "Tax Policy Handbook for State Legislators." National Conference of State Legislatures: April 2003.
¹⁰ Ibid.
¹¹ See "Tax Policy Handbook for State Legislators", National Conference of State Legislatures, December 1997, p 27-28.
¹² Ibid.
¹³ Mcnichal, Dunston. "State's Cigarette Plan Fizzles on Wall Street." The Star Ledger. 9/28/2004
¹⁴ Including all corporate, excise and sales taxes, as well as payments made under the Master Settlement Agreement and similar agreements with the states.
¹⁵ "The Tax Burden on Tobacco," Volume 36, Orzechowski and Walker, 2002.
¹⁶ Ibid.

The above information was obtained from the Philip Morris website

Link to Latest Customs Info on Product Infringements obtained from Customs Website 7/20/2005

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