BARRINGTON, Ill. – New Jersey legislators beware before you consider Gov. Gov. Jon Corzine’s (D) proposal to increase the state excise tax on cigarettes by another 35 cents per pack. According to a Willard Bishop analysis on New Jersey’s cigarette excise tax, smokers are going elsewhere to purchase their favorite brands and retailers and the state are paying the price.

While national demand for cigarettes has decreased nearly 18 percent between 1998 and 2005, demand in New Jersey during the same time period has declined 47 percent, notes the study. Willard Bishop also says it is likely that 60 percent of New Jersey’s cigarette decline is being driven by the state’s escalating cigarette excise tax rate. 

New Jersey’s cigarette excise tax rate has increased 500 percent since 1998 to become the second highest in the United States today at $2.40 per pack. Rhode Island has the nation’s highest cigarette excise tax at $2.46 per pack.

According to Willard Bishop Director David Bishop, the incentive for smokers to avoid paying New Jersey’s high cigarette excise tax is obvious.

“The annual savings associated with shifting purchases from New Jersey to Delaware is over $900 currently, and it would exceed $1,000 a year if the proposed increase is approved,” said Bishop, noting that because lower-income households are less mobile, they are more likely to rely on the Internet or purchase smuggled cigarettes from lower-taxed states.

Furthermore, the study found that the cumulative financial impact to New Jersey’s state budget and bondholders is estimated to be as high as $1,576.9 million between 1998 and 2005. For New Jersey retailers, the financial cost is estimated at $364.1 million during the same time period.

Bishop notes that this figure “equates to over $33,000 in lost gross profit dollars on an individual store basis over an eight-year period, and that is a conservative estimate because it doesn't account for the lost sales of additional products consumers purchase with tobacco in convenience stores.”
 
The study estimates that a proposed cigarette excise tax increase in New Jersey of 35 cents per pack in will decrease legal demand for cigarettes by 14.45 percent and the corresponding state tax excise revenue by 1.98 percent, or $15.5 million, during the first fiscal year.

“The impact of the proposed increase shouldn't come as a complete surprise since the increases associated with the last three rate changes have continued to shrink, indicating that the tax level is approaching the inflection point on the revenue curve,” said Bishop, adding, “Our analysis simply highlights that the proposed increases cross that point, which means any further increases in the tax rate will most likely result in a reduction in revenue for the state.”