It seems counterproductive to offer someone an income tax cut while hurting their ability to earn an actual income. Sadly, that is exactly what the state budget plan currently being debated by Ohio legislators will do to many struggling small business owners.
The new state budget proposal seeks to increase taxes by $5.2 billion. While the plan includes a small income tax cut for small business owners, its proposed tax increases, especially a massive tobacco tax increases, would be devastating to many family-owned retail and convenience stores.
That’s because cigarette sales are an important source of revenue for many Ohio retailers. In some stores, cigarettes account for nearly one-third of all sales. This is helpful for building downtown stadiums and augmenting state tax coffers. And government always looks to increase tobacco taxes to fund various pet projects. However, there is a tipping point where tobacco taxes hurts small retailers and actually reduces government revenue. This is already happening in Ohio.
Revenue collected from cigarette taxes in Ohio has declined by a nearly 6 percent a year over the last 10 years. In fact, cigarette taxes are such an unstable source of government revenue that the National Conference of State Legislatures has long advised states to not count on it when crafting state budgets.
It comes down to simple economics. When the cost of a product people want continues to increase, consumers will eventually seek out a more affordable way to get the product. In the case of cigarettes and other tobacco, this almost certainly includes crossing state borders and even buying online, completely tax free.
The proposed one-dollar cigarette tax increase will take the average cost of a pack to $7.33 in Ohio, the highest among the five states that border Ohio. And other tobacco products will also be significantly more expensive in Ohio, thanks to a proposed tax increase of more than 250 percent.
Retailers near our state’s borders will be hurt the most by this huge tax increase. These stores will not only lose tobacco sales to neighboring states. Sales of other products usually bought at the same time would fall, too, costing Ohio retailers more than $180 million in lost sales. For retailers and wholesalers the lost sales will translate into lost gross profit in excess of $209 million.
Other Ohio retailers will be hurt by black market sales. It should come as no surprise that a high cost over-the-counter product like cigarettes will encourage underground markets. In fact, cross-border cigarette smuggling is on rapid increase across the country.
In 2014, cigarette smugglers cost state and federal coffers $7 to $10 billion in lost revenue, according to the Federal Bureau of Alcohol, Tobacco, Firearms and Explosives. All things considered, increasing Ohio’s tobacco taxes to the highest in the region does not make a lot of economic sense. Ohio’s more than 12,000 retailers will suffer, smuggling will increase and the government certainly will not receive the revenue it expects.
While cutting income taxes for some small businesses may seem helpful, promoting policies that help those businesses to stay is more important.