As of June 1, 2020, Massachusetts banned the sale of flavored tobacco products, including menthol cigarettes. When signing the bill, Governor Charlie Baker (R) argued that the ban, which is the broadest in the country, was enacted to limit adolescents’ intake of nicotine products. While adolescent admission is a very real concern that deserves public attention, direct bans could hinder historically high smoking cessation rates. Legislators must pull the needle between protecting adult smokers ‘ability to switch and barring minors’ access to nicotine products.
Aside from public health concerns, a ban on flavored tobacco, including cigarettes in particular, has significant tax implications and can lead to unintended consequences such as increased smuggling. In Massachusetts, more than 21 percent of cigarettes smoked were purchased outside of the state in 2018 (latest data).
Tobacco excise taxes are already an unstable source of tax revenue. Restricting the tobacco tax base further by banning part of the tobacco sales as a whole could worsen the instability of this revenue stream while increasing the administrative and law enforcement costs associated with the ban, especially if the lost revenue is offset by increasing the tax rate on the remaining tobacco tax base.
Other states considering introducing a similar ban may want to learn the lessons of Massachusetts. Maryland is one of those states, but if its experience mirrors Massachusetts it could prove to be an extraordinarily expensive exercise. In fact, the bill in Maryland could be even higher than in Massachusetts, with 55 percent of smokers in the state’s smoke-menthol products, according to industry data (down from 34 percent in Massachusetts).
Seven months after the Massachusetts taste ban, early data are in for the real-world effects. If we just look at Massachusetts, the numbers might initially look like a public health success story: cigarette tax sales in Bay State are up 24 percent compared to June-November 2020 compared to the same months of 2019 In 2020, Massachusetts only saw a decrease of around 10 percent from the first half of 2019.
These figures seem to support the best argument in favor of implementing a ban: limiting tobacco and nicotine use. Unfortunately, if we dig a little deeper, it becomes clear that the Massachusetts ban on taste is not just restricted, it has only changed where Bay Staters buy cigarettes. In fact, after the Massachusetts ban, sales of cigarette tax stamps in the northeast (Massachusetts as well as Connecticut, Maine, New Hampshire, New York, Rhode Island, and Vermont) have remained remarkably stable compared to sales, and even increased a little in 2019.
From June 1, 2020 to September 30, 2020, 230,797,000 stamps were sold in the region. In the same period of 2019, that number was 225,897,000. This slight increase can be seen compared to the national figures, which forecast a decline in sales of around 2 percent for 2020. In other words, sales in Massachusetts fell, but not because people stopped smoking – just because those sales went elsewhere.
If we look at individual states, we can see that the ridges are distorted. The sales increase in the Northeast region is most notable in Rhode Island and New Hampshire, but all saw sales increase immediately after the ban. Unsurprisingly, New Hampshire benefits the most, as it is already the state in the nation with the highest cigarette outflow.
The declining and increasing sales are clearly affecting excise tax revenues in all of these states. Massachusetts levied excise taxes of $ 557 million on cigarettes and other tobacco products (OTP) in fiscal 2019 ($ 515 million on cigarettes). For the 2020 fiscal year, sales fell 10 percent in the first half of 2020, equivalent to a drop in sales of around $ 50 million.
While this is still in its infancy and the accelerated decline in FY 2021 is expected to continue more than 20 percent later in fiscal year, the cost of the taste ban for FY 2021 could be approximately $ 120 million ( without sales tax losses). Over $ 100 million is a significant cost to the state, especially given the fact that sales are simply relocated to other states and not actually eliminated.
In December 2019, the Massachusetts Department of the Treasury estimated the ban would cut collections by the marginally lower $ 93 million in fiscal 2021. Whatever turns out to be correct, that revenue is now being collected by Massachusetts’ neighbors.
Furthermore, these numbers only make up cigarettes. According to the Massachusetts Illegal Tobacco Task Force, smokeless tobacco is widely smuggled into the state because of the state’s high excise tax rates (210 percent of wholesale value). Due to the ban on taste, this smuggling activity is expected to increase. Available data for fiscal 2021 (through November 2020) shows that legal smokeless tobacco and OTP sales in the state have already declined 35 percent year over year.
However, state tax coffers are not all that is affected by this ban. Bans affect the large number of small business owners who operate vape shops, convenience stores, and gas stations. Policy makers should not lose sight of the law of unintended consequences when setting tax rates and regulatory systems for nicotine products.
Overall, initial signs suggest that the ban will not reduce tobacco use in the state. It is not in Massachusetts’ interest to pursue a public health policy that merely sends tax revenue to neighboring states without improving public health, and this approach should not be adopted by any other state. In addition, the flavored tobacco ban underscores the complications of conflicting tax and regulatory policies, the instability of excise duties beyond external cost pricing, and the public risks of putting consumers on the black market through excessive taxes or regulations.