April 10, 2009
Acknowledging Cross-Border Shopping and Smuggling Problems, New Law in Arkansas Taxes Cigarettes at Different Rates Along Different Borders
Border Zone Policy, a First in Cigarette Taxation, Has Potential Benefits, Drawbacks; How Other States React Remains Unclear
Washington, DC, April 10, 2009 - The eyes of economists and public policy experts will be on Arkansas, where a provision within legislation that increases the state's cigarette excise tax rate from $0.59 to $1.15 per pack also reduces cigarette excise tax rates in border towns, designed to mitigate the revenue loss the state could experience from border shopping.
In Tax Foundation Fiscal Fact No. 168, "Border Zone Cigarette Taxation: Arkansas's Novel Solution to Border Shopping Problem," Tax Foundation analyst Mark Robyn examines a new law that took effect on March 1. If two adjoining towns are separated by the state line, the cigarette tax in the Arkansas town is required to be equal to the cigarette tax in the adjoining town outside of Arkansas plus 3 cents, as long as the resulting tax rate is not greater than the state's standard tax rate. The law also provides that the excise tax on cigarettes sold in Arkansas within 300 feet of the state line, regardless of the area's population, be taxed at the bordering state's rate plus 3 cents if the resulting rate is lower than Arkansas's standard rate. Robyn points out that Arkansan legislators are shrewdly acknowledging that cross-border shopping for low-tax cigarettes is a major problem for tax enforcement, and are attempting to retain tax revenue and stop tax evasion.
"It is well documented that various tax evasion techniques are often associated with high excise taxes on cigarettes," Robyn says. "If this policy is successful in Arkansas other state legislatures may follow suit."
Before the passage of this legislation, the state's rate was $0.59 per pack and it had three neighbors with lower rates: Louisiana ($0.36), Mississippi ($0.18) and Missouri ($0.17). With the increase to $1.15 Arkansas has surpassed Tennessee ($0.62) and Oklahoma ($1.03), leaving it with only one neighbor with a higher excise tax on cigarettes: Texas ($1.41). Five of the six neighboring states now have a lower cigarette tax, with Missouri's and Mississippi's taxes each being nearly a dollar less per pack than Arkansas's.
The towns that qualify as border zone cities are Junction City (bordering Louisiana); Garfield, Gateway, Holiday Island, Mammoth Spring, Blue Eye, Pea Ridge, and Oak Grove (all bordering Missouri); Ft. Smith, Van Buren, Siloam Springs, Bonanza (all bordering Oklahoma); and W. Memphis (bordering Tennessee).
This new tax structure will probably result in a net revenue gain for Arkansas. Instead of giving up all of the revenue that would normally be lost in border shopping, they are now giving up only the revenue represented by the tax differential. Robyn also points out that there are potential drawbacks.
"This policy effectively allows neighboring states to set Arkansas's excise tax rate in the border zones," Robyn says. "Additionally, the state now has six cigarette excise tax rates to administer instead of just one, making administering and complying with the tax more burdensome for tax officials and retailers."
The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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