Should Missouri Raise Its Cigarette Tax?

The Show Me Institute helps me stay informed about local politics in my state of Missouri, and from the articles I’ve read they generally take a pretty pure libertarian perspective on things. Yesterday they posted an article about another potential attempt to raise the state’s cigarette tax of 17 cents per pack. Similar attempts have failed twice in the last few years, but the attempts keep coming back because there’s something attractive about trying to raise a cigarette tax rate that’s the lowest in the nation by almost 50%.

The Show Me Institute article says the latest proposal is once again trying to raise the tax from 17 cents to 97 cents a pack. While this would theoretically more than quintuple cigarette tax revenues, the article focuses on the unintended consequences of upsetting the state balance. It gives an anecdote of a Kansas border town where residents cross over to Missouri to save on Kansas’ 79 cent tax rate, and suggests that if Missouri overtops their rate, revenues will not rise as much as predicted because border traffic will start flowing the other way.

The articles doesn’t mention that Missouri’s other major border states would still have higher taxes: Iowa ($1.36), Arkansas ($1.15), and – barely – Illinois ($0.98). Missouri would still retain a tax advantage over those states. Of course, that advantage would be lessened, and could still make the marginal difference for customers who choose to currently cross state lines to buy cigarettes. The article also does not talk about the more obvious effect on demand for cigarettes within Missouri, which may be reduced in the face of increased price. So the article’s main point is not unreasonable: raising the cigarette tax in Missouri would probably bring in less revenue than expected.

However, it’s much harder to argue how much less. In fact, if the tax is quintupled, demand would have to fall by four-fifths in order for revenues not to rise at all, and that seems unlikely. (Thus the perpetual temptation to the state government to raise the comparatively low tax and increase revenues.)

Libertarians are supposed to oppose raising taxes, and to especially oppose raising taxes on arbitrary behaviors that are considered unhealthy by the state. (We all know the slippery slope about that, right?) One can argue about the negative externalities of smokers, but does the government have a right to discourage smoking in the privacy of one’s home? As idealistic as it is to make such arguments, the most compelling argument by those who want to raise the tax is simply that the other 49 states have cigarette taxes that are way higher than ours.

This is a surprising outcome for state’s rights. Strict constitutionalist love state’s rights because states have to compete with each other to satisfy citizens. What is supposed to happen is that states with low taxes and more friendly business environments create more jobs and happier citizens, causing more people to move there and eventually causing other states to have to lower their taxes to be more attractive. It’s a tax race to the bottom! Libertarian utopia! Woohoo!

But Missouri’s cigarette tax rate has been the lowest in the nation for years. Residents of Atchison, Kansas, have been crossing the border to buy cheap cigs this whole time, but Kansas hasn’t seemed too concerned about it. Arkansas and Iowa and and Illinois haven’t been rushing to lower their rates, either. All of the tax movement discussion seems to be about Missouri possibly raising their rates – the exact opposite of what libertarians might be expecting. Why is this?

Well, the real world is full of inertia, friction, and other factors that complicate consumer’s choices. It’s why so many people still live in California and New York despite their obviously horribly liberal state policies. And it’s why there aren’t so many smokers smuggling cigs from St. Louis to Chicago that Illinois has to worry about lowering its cigarette tax rate. I think libertarians who want to oppose a cigarette tax increase in Missouri are going to have to do so solely from principled arguments about freedom, because as a practical matter I think it’s very hard to argue that an increase wouldn’t significantly increase revenues for the state.