Tobacco tax revenue projections off by as much as 20 percent

Cigarette tax increases in Washington drive sales in Oregon, making accurate predictions difficult
The Lund Report

May 23, 2012 -- Smoking and tobacco use currently provides Oregon with approximately $260 million in tax revenue each year, not nearly enough to account for the $2.4 billion that tobacco products cost the state each year. Still, the tobacco tax is a revenue stream, one that is expected to provide the general fund with $132.3 million for the 2011-13 budget. While that is only slightly less than 1 percent of the general fund budget, it would be a lot of money to scramble for if that revenue source ran dry.

In order to create a budget, the Office of Economic Analysis provides the legislature with tobacco tax revenue forecasts. The Office of Economic Analysis forecasts tobacco tax revenue utilizing a 12-month moving average consumption level developed from the Department of Revenue’s Tax Distribution Record data.

Price effects and per capita consumption impacts are applied, as well as the forecast for the 18-year-old and older population. Over the past five biennia (2001/03-2009/11), the Office of Economic Analysis’ projections have been off anywhere from -4.8 to 20.9 percent. Why such a wide range?

Biennium

Forecast Error

2001-2003

 

Cigarette

-5.1%

Other Tobacco

-3.2%

Total Tobacco

-4.8%

 

 

2003-2005

 

Cigarette

-6.2%

Other Tobacco

-1.9%

Total Tobacco

-5.3%

 

 

2005-2007

 

Cigarette

10.1%

Other Tobacco

38.8%

Total Tobacco

16.6%

 

 

2007-2009

 

Cigarette

-6.0%

Other Tobacco

1.9%

Total Tobacco

-3.8%

 

 

2009-2011

 

Cigarette

14.1%

Other Tobacco

33.9%

Total Tobacco

20.9%

 

 

2011-2013 (as of March 2012)

 

Cigarette

-0.3%

Other Tobacco

-0.6%

Total Tobacco

-0.4%

 

According to Josh Lehner, an economist with the Office of Economic Analysis, in biennia where taxes are stable (not changing), Oregon’s forecasts are too optimistic by a few percentage points (01-03, 03-05, 07-09), however in the biennia with large positive errors (05-07 and 09-11) the only major changes that took place was Washington raising their tobacco taxes. In other words, Washington raising its tobacco taxes, means that Oregon also receives higher tax revenues, because higher taxes in Washington means more cigarette sales in Oregon.

In the summer of 2005 (the very start of the 05-07 biennium) Washington raised its cigarette tax per pack from $1.425 to $2.025 and then again in May 2010 (the middle of the 09-11 biennium) Washington raised another dollar to $3.025 per pack.

In the big picture tobacco consumption (packs sold) is on a long, relatively steady trend downward (revenues sometimes go up when taxes are raised, even though consumption is declining),” Lehner explained. “One of the things we’ve found is that the tax differential between Oregon and Washington is important. When Washington raises their taxes and we don’t immediately, it drives some Washingtonians to drive across the border and buy cheaper packs. The effect this has on Oregon tobacco taxes is that instead of declining slightly each year, when the taxes change, Oregon’s packs sold increases somewhat or at least holds steady, thus revenue is above forecast.”

Trista Davenport, who works at a Plaid Pantry near the Washington border, says that she often sells cigarettes to customers who live in Washington. “I can tell by their IDs, and they often tell me they are buying them in Oregon because they are cheaper than in Washington,” Davenport explained. “We aren’t right on the border but it still affects our sales. For places that sell cigarettes closer to the border (than we are) it rockets their sales.”

 According to Lehner, the Office of Economic Analysis does a “current law” forecast – meaning they take into account all Oregon and neighboring states laws on the books.

It’s hard to try and account for what other states do and we can only do so once we know Washington (or another neighboring state) has passed a law,” Lehner noted.

According to a KING 5 News story, in October 2010 data from the Washington Department of Revenue showed that tax stamp sales fell after the May 2010 tax increase by an average of three million stamps per month.  The state generated more money because of the new tax, but the number of tax stamps that cigarette wholesalers were buying, an indicator of legitimate cigarette sales, was down.

Image for this story appears courtesy of The Oregonian.

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