Arkansas Tobacco Tax Revenue Down 5.2%

Tax revenue is strong for the state of Arkansas in many of the largest collection areas, including income taxes, where year-to-date revenue is up more than 9%.

But one area where revenue has noticeably fallen is the area of tobacco taxes.

According to a memo from John Shelnutt with the Arkansas Department of Finance and Administration, revenues from tobacco taxes are down more than 5%, or $10.3 million, compared to this same time last year. In the July 2012-April 2013 period, tobacco tax revenue totaled around $188.2 million, down from the $198.4 million in the same period of the previous fiscal year.

The tax is on a variety of things, but mainly comes from the initial sale of tobacco products from distributors to retailers, according to Roland Darrow, an attorney for Arkansas Tobacco Control.

“That’s excise taxes. In other words, the tax placed on the first sale of a tobacco product in the state of Arkansas,” he said.

OUT OF STATE SALES
There are a variety of reasons, Darrow said, that revenues from the sale of tobacco products could be declining. Locally, he said smokers and other tobacco users could be going out of state to purchase the cigarettes they smoke everyday.

“There are places, the Missouri border in particular, where their cigarette tax rate is 17 cents a pack, while the Arkansas rate is $1.15 a pack. If you buy a carton of cigarettes in Missouri, you’ll save $10, $15, $20 a box over what you spend in Arkansas,” he said, adding that such purchases were not practical unless a tobacco-using consumer lived within a short drive of another state.

He said it was not uncommon for Arkansans who live in border regions, such as Northwest Arkansas and the Fort Smith area, to buy up to the personal possession limit of a carton plus an individual pack of cigarettes and bring it back to the state.

Another possibility for the reduction in revenue is that any non-cigarette items are not stamped, meaning Arkansas Tobacco Control and the DFA depend on retailers to accurately report their purchases of tobacco items from distributors.

CIGARETTE SMUGGLING
Some retailers, Darrow said, also buy their wholesale goods from out of state and pay lower rates.

“In Tennessee, I believe their rate is 6.2% or 6.6%. Arkansas is 68%,” he said. “All you have to do is drive across the Mississippi River and purchase products there.”

He said while it is legal to purchase the items in Tennessee, it becomes illegal once the purchaser drives back across the river.

“At that point, you’re breaking the law,” he said, adding that a retailer normally purchases between $2,000 and $5,000 worth of tobacco related products and smuggles it back to his or her store in Arkansas.

In order to try and salvage the revenues, Darrow said his agency has conducted anti-smuggling crackdowns and had even charged some violators criminally. But, he said, “I’m sure there’s a lot we don’t catch.”

OTHER REVENUE DECLINE OPTIONS
Dr. Gary Wheeler, the branch chief of infectious disease at the Arkansas Department of Health and the medical director for the department’s tobacco program, said other factors could be at play with the decrease in tobacco tax revenues.

“This could be due to decreased tobacco consumption, which is the goal of our programs,” he said.

Wheeler also acknowledged sales of tobacco in other states, before mentioning that the sale of new nicotine products, like electronic cigarettes, as well as black market purchases and Internet sales, could be to blame.

“We’re not going to know which of these are true until get new tobacco consumption survey information, which won’t be available” until 2014.

ADH Public Information Officer Ed Barham said while the revenues are down year to date, it was too early to tell if that would last through the end of the fiscal year.

“It’s month-to-month. It will vary up and down pretty dramatically,” he said.

TRAUMA SYSTEM SUPPORT
While some may genuinely want to believe that the rate of smokers has gone down, the speculation by Wheeler and Darrow leaves open other possibilities. Seeing tax revenue flee the state of Arkansas could have a negative impact on services that rely on the tobacco tax revenue for funding.

One of those is the trauma system established across the state.

“I know that when the tax was originally passed, there were some specific things that were to be funded and the trauma system was one of them,” said Debra Pate, communications director for the Arkansas Center for Health Improvement.

According to Pate, Arkansas was one of only two states in the nation to not have an established trauma system.

She said programs funded through the tobacco tax also include school health and wellness centers, as well as nearly two dozen other programs.

NO BUDGET PRESSURES YET
Back at Arkansas Tobacco Control, Darrow said the only program in his office funded through the tax was the minor smoking prevention program.

“We have basically put a 16 or 17 year old into a store to see if (merchants) will sell that individual tobacco products,” he said, adding that the program has been successful and has landed Arkansas in the top 10 states in the nation for having one of the lowest sale to minor rates.

But he said the money is not just used to bust merchants who sell to minors, but also to educate merchants.

“There are seminars they can send their employees to to avoid accidentally selling to a minor,” he said. “For stores having a difficult time, we will have individual training for those stores. We have worked with the retailers to make Arkansas one of the top ten (states) for the lowest sale to minor rates.”

While many of these programs could be at risk should revenues continue to drop from the tobacco tax, Barham said it would not have an impact anytime soon.

“Budgets for the Health Department’s programs for FY14 are already approved by the legislature and are being put in place to begin the years on July 1,” he said. “We do not anticipate any changes in this year’s budgets as a result of the shortfall in the tobacco tax revenue.”