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Richmond’s Proposed Cigarette Tax Increase Will Hurt Business

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On April 23, the Richmond City Council is scheduled to decide whether to approve a massive new cigarette tax. Throughout the debate, tax supporters have undersold both the extreme price jump the proposal represents and the likely and profound harm to local businesses if Richmond’s experience is similar to other jurisdictions that have significantly raised cigarette taxes.
Far from being “business as usual” the $8.00 per carton tax would equal the largest one time increase in the history in the Commonwealth of Virginia. The new tax rate would put Richmond in the top 4% of all local cigarette taxing jurisdictions in the entire country.
The tax being proposed represents an overnight price increase on each pack of cigarettes of 15% – 20%. The likely overwhelming consumer response will be to take their business to Henrico and Chesterfield County retailers. The cigarettes in those counties are exactly the same as the ones in Richmond, only at $8.00 per carton less if this tax is approved.
Following the recent tax increase in Petersburg, cigarette sales in the city plummeted while Prince George County sales increased by nearly 20%. Similarly, after a recent increase in Philadelphia, sales in that city fell by more than 50% while three surrounding Counties saw their volume increase by more than 24% – and this during a time of nationwide decline in cigarette purchases.
Proponents have regularly cited “success stories” such as Virginia Beach and Norfolk. These Cities are simply not situated similarly to Richmond as they border other high tax jurisdictions, providing a buffer from purchasers fleeing those cities.
Perhaps more importantly, cities such as Virginia Beach are engaged in an endless cycle of increasing cigarette taxes, which leads to more consumers taking their business out of that city, which leads to still more taxes just to maintain flat revenue. It is currently considering its 5th cigarette tax increase just in the last 10 years. Since 2006, Virginia Beach has increased its tax rate by 50% to gain less than 1% in revenue. This water-from-a-stone approach treats local businesses and adult smokers like bank teller machines. Richmond should run from this model, not seek to emulate it.
Moreover, even without these policies, cigarette taxes are a declining and fleeting revenue source. As the City of Norfolk put it in a recent budget document, “revenue generated from these rate increases tends to be short-lived.” Clearly, the important needs facing Richmond, including school maintenance, deserve better answers.
Richmond’s small business owners also deserve better answers. In recent City Council hearings local retailers shared concerns about how this tax would harm their businesses. These concerns have, at times, been dismissed as either not credible or too similar to objections raised during the meals tax debate as if all business is identical. If anything, these testimonies understate the potential business harm.
Indeed, City Council’s staff certainly views the business harm from the meals and cigarette taxes differently. Based on the City’s own revenue estimates, policy makers expect continued growth in prepared food sales in the City, even following the recent meals tax increase, compared with a massive collapse in cigarette sales in the City if the cigarette tax is implemented.
The City has built this outcome into its financial assumptions.
Without saying it explicitly, the City is projecting millions of transactions leaving Richmond stores. The business harm adds up quickly. When your neighbors buy cigarettes at the local convenience store, they frequently purchase many other items, including gas and snacks. Many adult smokers will likely take all of these purchases outside of the City, compounding the negative impact on local businesses.
Has Richmond contemplated the potential decline of business and sales tax collections from this massive purchasing shift?
When considering any tax, Richmond’s voters expect the Council to consider if “the juice is worth the squeeze.” The cigarette tax offers a potential short term bump of a declining revenue source that does little to solve the long-term funding needs of the City. This dramatic tax increase could cost local small businesses tens of millions of dollars in lost revenue and it would be an unfair burden on those in the lowest income brackets who buy the largest share of cigarettes. This is one tax Richmond should avoid.
(This column first ran in the Richmond Times Dispatch on April 12, 2018)
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