New Mexico, fresh off of cigarette tax hikes totaling $1.46 per pack in the past decade, now wants to take aim at smokeless tobacco and cigars. Calling the current 25% tax rate on smokeless products a “loophole,” tax hike cheerleaders want raise rates on all tobacco products to equal the new cigarette tax in the interest of fairness. I won't be breaking new ground with any of my arguments, but tobacco taxes still target the poor, still don't produce their advertised revenue, and they still hurt small businesses.
New Mexico currently enjoys a slight competitive advantage vis-à-vis most of its neighbors. The 25% tax rate on the first purchaser is lower than Colorado (40%), Oklahoma (60%), and Texas ($1.16 per ounce). The proposal to more than double the rate to 57% would make New Mexico more expensive than all but the Sooner State. Further complicating the situation are the multiple Native American reservations in the state, which have varying tax relationships with the state. What all this means is that small businesses, like convenience store owners, who rely on tobacco sales will be hit hard at the register as consumers buy less, or more likely just buy elsewhere.
Speaking of Native Americans, they are the group most likely to use smokeless tobacco, and are also the poorest demographic in New Mexico. In addition to having higher than average unemployment, many Native Americans can now also look forward to a massive tax hike that will hit them the hardest. I am not quite sure what is fair about adding another $350 in yearly taxes for a dipper who is already struggling to get by.
Finally, the past couple of years have not been kind to tobacco tax revenue estimates. The best example is the District of Columbia, which actually saw a decrease in collections compared pre-tax levels when it passed a massive increase in 2009. More recently, despite strong revenue growth across-the-board, Kentucky saw its tobacco tax revenue fall by over 5% when the state had projected an increase of over 10%. Maine is seeing similar numbers as well.
Governor Martinez announced her opposition to the proposal, so perhaps there is hope that the enchanting spell sin taxes hold over New Mexico’s lawmakers will be broken. In the meantime, NTU and others will continue to argue for a sane tax policy that doesn’t drive business out of state, and doesn’t target the poor.