Holding Whom Harmless: An Analysis of the Economic and Fiscal Impacts Associated with Proposition B

A report by Joseph Haslag, Ph D* August 20, 2012

*

Dr. Haslag is Professor and Kenneth Lay Chair in Economics at the University of Missouri-Columbia. The views expressed in this report are Dr. Haslag’s and do not reflect the views or opinions of the University of Missouri.

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Executive Summary
In this report, I quantify the economic and fiscal impacts associated with an increase in the Missouri cigarette excise tax. The November 2012 ballot includes Proposition B. If passed, Proposition B would raise Missouri’s state cigarette excise tax from $0.17 to $0.90. Suppose everything else in Missouri remained unchanged. Consistent with such a tax increase, cigarette prices in Missouri will increase and the quantity purchased in Missouri will decline. Proposition B would have effects on other tobacco products and on a select group of tobacco manufacturers. If passed, roll-your-own tobacco would be subject to a 35 percent tax applied on manufacturers’ invoice price. Missouri would apply a 25 percent tax on the invoice price on tobacco products other than cigarettes. Currently, both roll-your-own and other tobacco products are subject to a 10 percent tax on the invoice price. In addition, cigarette manufacturers that did not participate in the Master Settlement Agreement—so-called Non-Participating Manufacturers—would be required to make a $0.569 payment per pack sold in Missouri as the allocable share repeal is implemented. Overall, NonParticipating Manufacturers would see taxes on their cigarettes increase by $1.299 per pack. Data are not readily available for sales of roll-your-own and other tobacco products. Consequently, in this report, I focus on cigarette sales. Two impacts are analyzed in this report. The economic impact is measured by the change in the quantity of cigarettes purchased in Missouri. The fiscal impact is measured by the change in revenues collected by Missouri’s state, county, and municipal governments. At the state level, there will be new revenues collected from the higher excise tax. It is important to note that existing funds will not be held harmless as the expected monies paid per year into the State School Money Fund will decrease by $3.3 million, the expected monies paid into the Health Initiative Fund will decrease by $1.5 million per year, and the expected monies paid into the Fair Share Fund will decrease by $1.5 million per year. Thus, the expected decrease to the three funds is $6.3 million. In addition, sales tax receipts collected by Missouri will suffer. In each of the three political subdivisions, sales taxes are collected as a fraction of cigarette prices before any state excise sales tax is applied. Accordingly, a decrease in the quantity of cigarettes purchased in Missouri will affect the sales tax revenues. The total reduction in expected state sales tax collection is $16 million per year. Sales tax collections by counties and municipalities will also be affected. In my baseline model of cigarette purchases by political subdivision, my calculations indicate that the expected decrease in Missouri county sales tax receipts is $6.7 million per year. St. Louis County is expected to see sales tax receipts fall by $1.8 million per year alone. St. Louis City is expected to lose over $900,000 in sales tax receipts per year

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and the city is expected to lose another quarter million dollars in city excise taxes collected per year. Sales tax receipts collected by municipalities will also fall. By my calculations, the twenty largest municipalities, excluding St. Louis City, would see total sales tax receipts fall by $2.6 million per year if Proposition B passes. Each political subdivision is collecting its own sales tax on cigarettes. With Proposition B passing, Missouri’s cigarette excise tax will be higher than Kansas, Nebraska, Kentucky and Tennessee. I modify the baseline model to account for cigarette purchases by county. There are 16 counties that are contiguous to those four states. The modified model is constructed so that cigarette purchases in those 16 counties exhibit greater price sensitivity than counties not contiguous to those four states. For Jackson County, sales tax receipts are expected to decrease by over $500,000 per year with border effects taken into account. In addition, Jackson County is expected to lose another $500,000 in county excise tax receipts per year. Thus, Proposition B will reduce state, county & municipal revenues by $34.8 million per year as follows:

  

$6.3 million per year from existing funds = $3.3 million from the State School Money Fund + $1.5 from the Health Initiative Fund + $1.5 million from the Fair Share Fund. $25.3 million per year in sales taxes = $16 million state + $6.7 million county + $2.6 million municipals. $3.2 million per year in local cigarette excise taxes.

In summary, a higher cigarette excise tax in Missouri will raise cigarette prices and reduce the quantities of cigarettes purchased in Missouri. The price increase will have adverse effects on the state, county and municipal revenues that rely on cigarette purchases. Based on economic theory, Proposition B fails to satisfy the hold-harmless condition. Indeed, the fiscal impacts will be widespread and felt by every political subdivision in the state of Missouri. Instead, no one will be held harmless if Proposition B passes.

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1. Introduction Missourians will consider an increase to the state’s cigarette excise tax. The November 2012 ballot initiative—hereafter referred to as Proposition B--raises the tax from $0.17 cents per pack to $0.90 cents per pack. An increase in cigarette excise taxes will increase the price that consumers pay. Consumers respond to higher prices by reducing their purchases. As cigarette purchases decrease, there are two important questions. First, what is the expected decrease in cigarette purchases in Missouri owing to the higher cigarette excise tax? Second, what are the implications of the decreased purchases on tax receipts for state, county and municipal governments? The Missouri State Auditor provided an answer to the first question. In the Fiscal Note for Proposition B, the Office of Administration calculated the expected decrease in cigarette purchases in Missouri. In this report, I assess the validity of the underlying assumptions used by the Office of Administration in their calculations. The State Auditor’s Fiscal Note completely ignored the fiscal impact; that is, How will the cigarette excise tax affect tax receipts paid to the state, counties and cities in Missouri? In the current economic environment, with budget stresses at the state and local levels continuing from the last economic recession, the answers to the second question are particularly important. The purpose of this study is to quantify the effects that the excise tax increase will have on economic activity and fiscal impacts. In particular, I am interested in assessing the revenue impacts on state and local jurisdictions. I structure my analysis on the following five questions: the effects on (i) statewide cigarette sales; (ii) revenues from the additional excise tax and the expected monies distributed to the new excise tax funds; (iii) revenues paid to the existing excise tax funds; (iv) general revenue fund from sales taxes; and (v) revenues collected at the county level and for selected municipalities across the state. The report is organized as follows. Section 2 provides an overview of the most important elements of Proposition B. In addition, I describe the current excise tax structure. In Section 3, I present evidence on state excise tax receipts over time, focusing on the most recent evidence as a way to initialize the analysis. I quantify the expected economic impact that a $0.73 increase in the cigarette excise tax will have on the quantity of cigarette packs purchased in Missouri in Section 4. I compare my results with those presented in the State Auditor’s Fiscal Note and compute the expected fiscal impacts that the reduced quantity of cigarette purchases will have on state sales tax receipts. In Section 5, I compute the expected sales tax receipts lost by county and selected city governments because of the reduction in cigarette purchases accompanying the excise tax increase under Proposition B. I consider two alternatives, one in which the cigarette purchases are distributed according to county populations and another in which there is a border

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effect for counties contiguous to Kansas, Nebraska, Kentucky and Tennessee. I pick those four states because Proposition B would result in cigarette prices in Missouri being higher than in those four contiguous states. An alternative analysis conducted by Campaign for Tobacco Free Kids is presented in Section 6 along with the implied expected revenue impacts per year. Section 7 offers a brief summary of my findings. 2. Proposition B: Key Features of the Law Currently, Missouri collects 17 cents on each pack of cigarettes sold within the state. Missouri’s state cigarette tax is the lowest in the nation. Table 1 provides July 2012 data on state-level cigarette taxes for all fifty states and the District of Columbia. As Table 1 shows, Missouri applies the lowest tax per pack of cigarettes in the United States. The next lowest state cigarette tax is Virginia’s $0.30 per pack. Meanwhile, New York State collects $4.35 per pack, followed by Rhode Island collecting $3.50 per pack. Table 1 State Cigarette Excise Taxes and Rankings State Tax $0.425 Alabama $2.00 Alaska $2.00 Arizona $1.15 Arkansas $0.87 California $0.84 Colorado $3.40 Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Rank 47th 11th 11th 30th 33rd 34th 3rd State Tax $0.60 Kentucky $0.36 Louisiana $2.00 Maine $2.00 Maryland $2.51 Massachusetts $2.00 Michigan $1.60 Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina Rank 40th 49th 11th 11th 10th 11th 21st State North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Tax $0.44 $1.25 $1.02 $1.18 $1.60 $3.50 $0.57 Rank 46th 28th 31st 29th 21st 2nd 42nd

$1.60 21st $2.86 6th $1.339 $0.37 $3.20 $0.57 $1.98 $0.995 $1.36 $0.79 27th 48th 4th 42nd 16th 32nd 26th 36th

$0.68 37th $0.17 51st $1.70 $0.64 $0.80 $1.68 $2.70 $1.66 $4.35 $0.45 17th 38th 35th 19th 7th 20th 1st 45th

$1.53 24th $0.62 39th $1.41 $1.70 $2.62 $0.30 $3.025 $0.55 $2.52 $0.60 25th 17th 8th 50th 5th 44th 9th 40th

Source: Campaign for Tobacco-Free Kids; http://www.tobaccofreekids.org/research/factsheets/pdf/0097.pdf

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Proposition B is on the November 2012 Ballot. The ballot initiative, if passed, would increase the Missouri excise tax from $0.17 to $0.90 per pack, or a 429 percent increase in the Missouri cigarette excise tax. Additionally, Proposition B repeals a provision in the Missouri escrow statute that will cause Non-Participating Manufacturers (hereafter NPMs) to escrow an additional $0.569 per cigarette pack. In doing so, the base price for NPM cigarette brands will increase by $0.569 per pack. 1 The escrow is not a tax per se, but acts like a tax causing the price of the NPM brands to increase. Current law allows NPMs to receive a refund of monies escrowed in excess of the state’s share of national tobacco settlement payments and allows NPMs to receive all escrowed monies after 25 years. Proposition B, if implemented, would deny this refund. Thus, when coupled with the cigarette excise tax increase, the additional escrow requirement results in the price of NPM cigarette brands to increase by more than 760 percent. Proposition B also includes language that affects retail tobacco sales. Specifically, the tax on roll-yourown cigarettes will increase from 10 percent to 35 percent on tobacco sales. Other tobacco products, such as cigars and smokeless products, will be subject to a 25 percent tax rate, 15 percentage points above the current 10 percent rate. Wholesale cigarette sellers apply the state tax stamp. The compensation paid to wholesalers will fall from 3 percent of the face value of the stamp to one-half cent per stamp under Proposition B. Proposition B specifies where monies from the tax increase are to be distributed. Monies collected from the $0.73 cigarette excise tax increase will not go into the state’s general revenue fund. Rather, the state treasury will create a new fund—the Health and Education Trust Fund—and revenues from the excise tax increase are dedicated to that fund. Within the Fund, monies will be allocated into three separate accounts: (1) Tobacco Use Prevention and Quit Assistance Account; (2) Public Education Account; and (3) Public Higher Education Account. Monies generated by the proposed cigarette tax hike will be distributed as follows: 20 percent will be credited to the Tobacco Use Prevention and Quit Assistance Account, 50 percent will be credited to the Public Education Account, and 30 percent will be credited to the Public Higher Education Account. The bottom line is that if Proposition B passes, cigarette prices in Missouri will increase as sellers pass the tax increase along with the NPMs’ per-pack fee along to buyers. With an increase in cigarette prices, the quantity demanded will decline.

1

Non-Participating Manufacturers are cigarette manufacturers who are not included in the 1998 Master Settlement Agreement. The Master Settlement Agreement (hereafter, MSA) required the states to pass legislation that included a provision that imposed a per-pack fee on non-participating manufacturers. The funds were to be placed in an escrow account and applied against any claims made by a state against a NPM.

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3. Proposition B revenue impact Effective October 1, 1993, Missouri implemented its $0.17 cigarette tax.2 Figure 1 plots the cigarette tax revenue by calendar year from 1993 through 2011. The data indicate a sizeable increase between 1993 and 1994, owing partially to fact that the cigarette tax was $0.13 from January 1, 1993, through September 30, 1993. Figure 1 shows that cigarette tax revenues peaked at nearly $100 million in 1996. There is a modest downward trend present in cigarette taxes collected since 1996. In 1996, Missouri’s cigarette excise tax raised $109.7 million. Since 1996, cigarette taxes have, on average, fallen 1.1 percent a year. In 2011, Missouri reported $88.67 million in cigarette taxes collected. Note that the Bureau of Labor Statistics has a price index for cigarettes. According to their data, cigarette prices have increased at average annual rate of 9.1 percent since 1997. The price increases reflect all the factors affecting the equilibrium retail price, including cigarette tax increases.3 It is straightforward to compute the number of cigarette packs purchased in Missouri. Divide the cigarette excise tax revenue by the excise tax per pack and the result is the quantity of cigarette packs sold in Missouri. Thus, divide the revenue by 0.17.

Figure 1

Cigarette Tax Revenue--Missouri 1993-2011 (Calendar Year)
120,000 110,000 100,000 90,000 80,000 1993

1998

2003

2008

2 3

See Missouri Revised Statute 140.015. Other factors would include tobacco costs, labor costs, people’s preferences and the like.

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Based on the historical cigarette tax revenue collected, the number of packs sold in Missouri peaked in 1996 at over 645 million packs. In 2011, the quantity sold was 521,588,235 packs. Compared with 1996, over 123 million fewer cigarette packs have been purchased in Missouri in 2011. 4. Quantity Effects The purpose of this section is to compute the expected number of cigarettes sold if the proposed excise tax is implemented. The Law of Demand says that a good’s quantity demanded is negatively related to the price. The Law, however, leaves open the question of how sensitive the quantity demanded is to an increase in the price. In the case of cigarettes, the conventional wisdom is that quantity is not very sensitive to price changes. In economics parlance, sensitivity is referred to as elasticity. Formally, elasticity is the percentage change in quantity divided by the percentage change in price. To illustrate, suppose the price of a good goes up, say, ten percent and the quantity goes down by three percent. In this example, the elasticity of demand is 0.3. Because the number is less than one, the good’s demand is inelastic.4 When designing a tax system, inelastic goods are desirable precisely because a tax increase creates a smaller distortion in terms of the change in the quantity chosen by consumers. The demand for cigarettes is believed to be inelastic. It may be true for national markets. The mistake made by state governments is that the measure of the elasticity depends on the definition of the market. For example, at the national market, a countrywide price increase of ten percent may not affect the quantity consumed by people. In contrast, if the price increase is focused on just on a single store, people will be able to avoid the price increase by purchasing their cigarettes at a nearby store. From the perspective of the single, price-raising store, the elasticity of demand is infinity since the quantity purchased will fall to zero. If the market is small geographically, there are more substitutes for cigarettes in that market and the elasticity increases. States are somewhere between the global market size and the single-location size. Given the price increase that accompanies a tax hike, the implication is that the quantity of cigarettes purchased in Missouri are more sensitive to such a price increase than if the prices of all cigarettes across the country increased. Assumption 1: The elasticity of demand for Missouri cigarettes is 1.2.
4

The astute reader will recognize that the elasticity is a negative number since the quantity demanded decreased by three percent while the price increased by ten percent. It is standard to focus on the absolute value of the elasticity. Hence, throughout this report, I will refer to the elasticity of demand as a positive value.

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Assumption 1 plays a critical role in computing the economic impact of Missouri’s proposed cigarette excise tax increase. Because the excise tax increase is 429 percent, some consumers will quit smoking. Moreover, consumers presently crossing state lines to purchase lower-priced Missouri cigarettes will do so less frequently. In the case of border areas between Missouri and four states--Kansas, Nebraska, Kentucky and Tennessee—the increase in the Missouri tax will result in Missourians crossing the border into these four states to purchase lower-priced cigarettes. Goolsbee and Slemrod (2004) find that the online sales alternative raises the elasticity of cigarette sales to between 1.2 and 2. Throughout my analysis, I use the lower end of the Goolsbee-Slemrod range. My principal reason is that 1.2 is a conservative estimate of the elasticity of state cigarette purchases in Missouri. An elasticity of 2 is plausible, but with changes to the Jenkins Act, it is more plausible to use the more conservative value. With an elasticity value, we need three additional values to compute the quantity of Missouri cigarettes sold under the proposed excise tax. Specifically, we need to know the current quantity of cigarettes sold in Missouri, the current price of Missouri cigarettes and the projected price of Missouri cigarettes with the proposed excise tax implemented. To obtain the quantity of cigarette packs sold in Missouri, we use the amount of taxes collected in Missouri and divide that revenue figure by $0.17, which is the current cigarette excise tax. In calendar year 2011, the Department of Revenue reported that it collected $88,670,000 in cigarette excise taxes. At $0.17 per pack, this implies that 521,588,235 cigarette packs were purchased in Missouri.5 The current consumer price is obtained from the report, The Tax Burden on Tobacco, Vol. 46 (2011). Not all cigarettes packs have the same price. Instead a weighted average price is reported using quantity and price data for the different cigarettes sold in Missouri.6 In 2011, the weighted average price was $4.30 in Missouri. With a $0.17 excise tax, the pre-tax price of Missouri cigarettes is $4.30 - $0.17 = $4.13. Note that the pre-tax price is relevant because Missouri collects sales tax on cigarette prices, which is computed as the product of the pre-state-excise-tax price and the sales tax rate. Assumption 2: All cigarette excise taxes are passed through completely to consumers. With Assumption 2, it is straightforward to compute the consumer price of cigarettes for the case in which the proposed excise tax is implemented. I use as the initial consumer price of cigarettes in Missouri. By Assumption 2, I add $0.73 to the current consumer price. In addition, the fee charged on NPM’s cigarettes is $0.569. In Missouri, 23 percent of the cigarettes purchased are from NPMs. Thus, with Proposition B

5 6

The arithmetic is $88,670,000/$0.17 which equals the number of cigarette packs. See Table 14 on p. 186.

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passing, the price is $4.30 + $0.73 + (0.23)*($0.569). Correspondingly, the consumer price must account for the market share of NPM cigarettes times the fee applied on those cigarettes. The projected Missouri cigarette price is $5.16 per pack if Proposition B passes. With the current price, the price including the higher state excise tax and fees, the current quantity and the elasticity of demand for cigarettes, we can compute the expected number of cigarettes sold in Missouri if the cigarette excise tax is raised from $0.17 to $0.90. The equation is the arc elasticity formula, represented as

( where ε is the elasticity of cigarette demand, increase in the cigarette excise tax,

)

(

)

is the quantity of cigarettes sold with the proposed is the price of

is the quantity of cigarettes sold in 2011,

cigarettes with the proposed increased in the cigarette excise tax and

is the price of cigarettes in 2011.

With excise taxes increasing 429 percent, the effect on consumer prices is an 18 percent increase. With the proposed increase in the cigarette excise tax, I compute that the expected number of cigarettes purchased in Missouri will fall from 521,588,235 packs a year to 429,360,450 packs in the first year after the excise tax increase is implemented. Thus, the quantity of cigarettes purchased in Missouri is expected to decrease by 92,227,785 packs Comparison with Missouri State Auditor’s Office Fiscal Note In the January 30, 2012 fiscal note, officials from the Office of Administration (hereafter, BAP) computed the expected revenue impact with a $0.73 increase in the cigarette excise tax implemented. Table 2 reports the values for the price elasticity of cigarettes, the current price, the current quantity, the expected price if the $0.73 excise tax were implemented, and the expected quantity if Proposition B passes for both the baseline model and the BAP. Table 2

Variable

Baseline
521,588,235 $4.30 $5.16 1.2 429,360,450

BAP
529,211,235 $4.50 $5.23 0.8 469,281,167

Ε

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There are some minor differences that arise because BAP used Fiscal Year while the Baseline uses calendar year values for the initial quantities. In addition, BAP uses $4.50 as the initial price instead of the $4.30 Tax Burden on Tobacco report. Lastly, BAP uses a smaller price elasticity of demand for cigarettes. Overall, the change in cigarettes purchased in Missouri falls by approximately 60 million packs according to the BAP analysis while my baseline model calculates the expected number of packs purchased in Missouri to decrease by approximately 92 million packs. One factor plays the largest role in accounting for the discrepancy between my findings and those presented by BAP in the State Auditor’s Fiscal Note. The most important difference is the value of the elasticity of cigarette demand. BAP offers no economic justification for using the elasticity of cigarette being equal to 0.8. Instead, they reference the elasticity estimates by Campaign for Tobacco Free Kids equal to 0.4 and the Goolsbee and Slemrod value of 1.2, picking the midpoint of those two estimates. A key problem with settling on the midpoint is that the Campaign for Tobacco Free Kids estimate is consistent with the elasticity of cigarette demand in the national market. Here, the appropriate measure of market is the state. Therefore, a greater elasticity value is justified in this analysis. It follows immediately that with two different quantities, the fiscal impacts on state revenues will be different. According to BAP’s calculations, Missouri should expect to receive an additional $332,387,140 in cigarette tax revenue in Year 1 of the cigarette excise tax increase. With the higher elasticity of cigarette demand, my calculations indicate that Year 1 expected additional cigarette excise tax revenues are $313,433,128. Thus, with a more reasonable elasticity value, the expected gains in cigarette excise tax revenues will decline by nearly $19 million. 4.1 Revenue implications for new and existing state funds Currently, cigarette excise tax revenues are allocated between three funds. The State School Money Fund receives $0.09 per pack sold in Missouri while the Health Initiatives Fund and the Fair Share Fund each receive $0.04 per pack. Proposition B specifies that these three funds will be held harmless. Indeed, stipulates that monies from the $0.73 cigarette excise tax will be allocated to each fund so that the holdharmless condition is satisfied. The transfer cannot exceed 3 percent of the new additional revenues. The baseline model expects that annually 92 million fewer packs of cigarettes will be purchased in Missouri if the $0.73 excise tax increase is implemented. Multiplying the reduction in cigarette packs purchased in Missouri by $0.17, we know the expected reduction in monies allocated to the three existing funds; the expected reduction is $15,678,723 per year. According to the cap on amounts transferred from new revenues, the maximum transfer amount is 0.03 times $313,577,020, which equals $9,402,994 per

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year. The difference between the hold-harmless amount and the transfer cap is $6,275,730 per year. If the difference is allocated among the three existing funds by the allocation formula, then the State School Money Fund will see its funding allocation decline from the cigarette excise tax by $3,322,445 per year. In addition, the Health Initiatives Fund and the Fair Share Fund will each see their funding allocation from the cigarette excise tax decline by $1,476,642 per year. Monies from the $0.73 increase in the cigarette excise tax are dedicated to a newly created Health and Education Trust Fund. Additional costs associated with implementing the increase in the cigarette excise tax are to be paid from this fund. The additional costs cannot exceed 1.5 percent of the revenues from the $0.73 excise tax increase. Of the net proceeds—that is, the revenues collected from the $0.73 excise tax increase less the hold-harmless transfer less the additional actual costs—are apportioned among three accounts. The Tobacco Use Prevention and Quit Assistance Account is credited 20 percent of the new excise tax monies, the Public Education Account receives 50 percent, and the Public Higher Education Account receives 30 percent. Based on the expected new monies calculated in the baseline model, the Tobacco Use Prevention and Quit Assistance Account will receive 0.2 times $299,328,637 per year, which equals $60,491,180 per year. Meanwhile the expected monies credited to the Public Education Account will be $151,227,951 per year and the Public Higher Education Account is expected to be credited $90,736,771 per year. 4.2 Sales Tax Revenues Missouri collects sales tax on cigarettes purchased in Missouri. The state sales tax is $0.04225 per dollar of cigarette sales. The sales tax rate is applied to the pre-excise tax price of the cigarette pack. With a decline in the number of packs purchased in Missouri, sales tax collection will decline. Of the $0.04225 per dollar, three cents is placed in Missouri General Revenue, 1/8 cent is dedicated to Conservation, $0.01 to Education, and $0.001 to Parks and Soil. Assumption 3: Foregone cigarette purchases are not spent on items subject to Missouri sales tax. Hereafter, I will refer to the calculations based on this model as the baseline model. The baseline model takes the difference between the current and Proposition B quantity of cigarette purchased in Missouri. I multiply this difference by the price of cigarettes subject to the sales tax by the sales tax rate. I find that the expected decline in state sales tax is $16,093,057. Of this amount, there will be an expected reduction in General Revenue equal to $11,427,023 less state sales tax monies collected per year. In addition, the sales tax monies dedicated to Education will decline by $3,809,008 per year, sales tax monies dedicated to Conservation will decline by $476,126 per year and sales tax monies dedicated to

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Table 3 Annual State Revenue Picture with Cigarette Excise Tax Increase Implemented New Revenues $0.73 excise tax increase less hold harmless transfer less actual cost equals net new revenues Revenue Losses State Sales Tax equals General Revenue plus Education plus Conservation plus Parks/Soils
Source: author’s calculations

$313,433,128 $9,402,994 $4,701,497 $299,328,637

$16,093,057 $11,427,023 $3,809,008 $476,126 $380,901

Parks and Soil will fall by $380,901 per year. Table 3 provides an overview of the annual impact to state revenue if the cigarette excise tax increases from $0.17 to $0.90. 5. County and Municipal Revenue Impacts In this section, I examine the effects that changes in the cigarette excise tax will have on political subdivisions within Missouri. In the baseline model, there is no assumption regarding the distribution of cigarette purchases within Missouri. In other words, the analysis focuses on the statewide impact. What is the distribution of cigarette purchases in Missouri by county? Direct measurement is not possible since the tax data are not compiled at the county or city level. Therefore, I must make an assumption in order to pin down distribution of cigarettes purchased in each of Missouri’s 114 counties and St. Louis City.7 Assumption 4: Cigarette purchases per Missourian are constant.

7

The federal excise tax is applied to cigarette manufacturers. Thus, the state and local sales taxes are generally applied to the wholesale cigarette price, which already includes the federal excise tax. However, state and local sales taxes are applied against the sales price less the state excise taxes.

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Because Missouri currently has the lowest cigarette excise tax in the nation, it is natural to expect that Missouri sells cigarettes to people living outside Missouri. Hence, the distribution of population along Missouri’s border plays a big role in determining the distribution of cigarette sales inside Missouri. Assumption 4 embodies the population of people living along the Missouri border in the sense that if large numbers of out-of-state buyers are coming to Missouri to purchase cigarettes, there will be employment in those Missouri stores. Insofar as population is positively related to employment, population in the Missouri counties will mirror cigarette buying out-of-state folks. Therefore, I assume cigarette purchases per Missourian is a constant and is a reasonable proxy for cigarette purchases by county. Appendix 1 is a table with population data for all 114 counties in Missouri and the City of St. Louis. The population data are 2011 levels taken from the United States Census Bureau. We know the quantity of cigarettes purchased in Missouri. Divide the quantity by the county weight, where the weight is simply the fraction of Missouri’s state population. If the proposed cigarette excise tax is implemented, there will be a decrease in the quantity of cigarettes purchased in Missouri. I use the expected decrease in cigarette purchases statewide and allocate that decline by the population of people living in each Missouri county. In other words, each county’s population weight is multiplied by the expected quantity of cigarettes purchased in Missouri. For example, if County X has 10 percent of the Missouri population and statewide cigarettes sales decline by 50 million packs because of the cigarette excise tax increases, then cigarettes purchased in County X would fall by 5 million packs. To compute the expected decline county sales tax revenues, we need the decrease in the number of cigarette packs sold. Next, multiply the decrease in the number of cigarette packs sold in the county by the pre-excise tax price per pack, which is $4.13. The resulting product is the measure of sales lost by county. Finally, I multiply the lost sales by the county sales tax rate to obtain the expected decline in county sales tax revenues. Table 4 reports the county sales tax rate and the expected decrease in sales tax revenue for each county in Missouri. By far, the largest decline in expected sales tax revenue occurs in St. Louis County. With nearly 1 million inhabitants, or 1/6th of Missouri’s population, St. Louis County would see cigarette purchases decline by over 15.2 million packs. At $4.13 per pack, this amounts to annual cigarette sales falling by over $64 million. In St. Louis County, the sales tax rate is 2.95, resulting in sales tax revenue falling by over $1.86 million per year.8

8

The baseline model is subject to forecast errors. For example, St. Louis City collects a city excise tax. For Fiscal Year 2011, it is possible to back out the number of cigarette packs purchased in St. Louis City from the city excise

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Table 4 Expected Annual Sales Tax Revenue Decreases By County With Proposition B Passing Decrease in Annual County Sales Tax Revenue $ 16,192.45 $ 18,525.25 $ 7,940.49 $ 30,377.48 $ 27,948.01 $ 7,811.69 $ 10,778.07 $ 16,655.77 $ 12,723.86 $ 131,198.48 $ 62,499.86 $ 27,301.31 $ 11,805.94 $ 28,149.21 $ 34,599.54 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 48,562.14 7,620.31 4,033.54 79,254.41 8,838.93 9,802.16 87,132.96 8,895.96 124,850.09 13,174.11 72,668.31 19,588.00 27,502.83 8,657.85 21,227.88

County Sales Tax Rate 0.01 0.017 0.0225 0.01875 0.0125 0.01 0.01 0.01375 0.01625 0.0125 0.011 0.01 0.02 0.01 0.0125 0.01 0.0125 0.01 0.0125 0.01 0.02 0.0175 0.02 0.00875 0.01 0.015 0.0175 0.0175 0.0175 0.02

County Adair Andrew Atchison Audrain Barry Barton Bates Benton Bollinger Boone Buchanan Butler Caldwell Callaway Camden Cape Girardeau Carroll Carter Cass Cedar Chariton Christian Clark Clay Clinton Cole Cooper Crawford Dade Dallas

tax receipts. The data are consistent with 66.16 million cigarette packs sold in St. Louis City in Fiscal Year 2011. The baseline model assigns St. Louis City 27.6 million packs by its population share. Note that expected sales tax revenue decrease is not necessarily affected by the initial quantity of packs, rather the change in the packs purchased in St. Louis City matters.

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0.015 0.01 0.01 0.01 0.01 0.0175 0.01375 0.01 0.01125 0.015 0.0125 0.01 0.015 0.025 0.025 0.009375 0.015 0.01125 0.00975 0.01625 0.025 0.02 0.01 0.01625 0.015 0.02375 0.0175 0.01 0.0075 0.02 0.01375 0.015 0.0166667 0.01125 0.0225 0.01 0.0175 0.015 0.1 0.0175 0.01

Daviess DeKalb Dent Douglas Dunklin Franklin Gasconade Gentry Greene Grundy Harrison Henry Hickory Holt Howard Howell Iron Jackson Jasper Jefferson Johnson Knox Laclede Lafayette Lawrence Lewis Lincoln Linn Livingston McDonald Macon Madison Maries Marion Mercer Miller Mississippi Moniteau Monroe Montgomery Morgan

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

7,901.99 8,090.52 9,933.97 8,585.45 20,262.11 113,047.72 13,216.57 4,300.33 197,631.12 9,722.31 7,023.04 14,080.31 9,151.98 7,626.65 16,165.83 24,153.10 10,129.15 482,189.87 73,176.62 226,014.32 84,661.50 5,229.34 22,582.74 34,197.69 36,710.57 15,283.79 58,860.49 7,963.15 7,164.36 29,121.31 13,585.15 11,592.06 9,686.21 20,472.89 5,423.89 15,696.89 15,865.14 14,920.92 55,347.86 13,607.25 12,992.24

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0.01 0.00875 0.01 0.01 0.0175 0.015 0.0125 0.01875 0.01 0.00875 0.02 0.01375 0.01 0.0075 0.02 0.02 0.01 0.015 0.01 0.015 0.01725 0.005 0.02 0.0125 0.0295 0.01625 0.02 0.0125 0.01 0.01 0.015 0.01 0.0175 0.0275 0.01625 0.015 0.01 0.02 0.025 0.01 0.01833

New Madrid Newton Nodaway Oregon Osage Ozark Pemiscot Perry Pettis Phelps Pike Platte Polk Pulaski Putnam Ralls Randolph Ray Reynolds Ripley St. Charles St. Clair Ste. Genevieve St. Francois St. Louis Saline Schuyler Scotland Scott Shannon Shelby Stoddard Stone Sullivan Taney Texas Vernon Warren Washington Wayne Webster

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

11,902.90 32,390.13 14,871.81 6,981.54 15,431.53 9,120.61 14,396.21 22,624.48 26,728.44 24,963.25 23,538.37 79,207.91 19,752.61 25,272.98 6,309.17 13,030.26 16,061.91 22,081.48 4,174.85 13,443.75 399,162.04 3,054.78 22,970.57 51,945.65 1,866,986.73 23,973.09 5,552.53 3,824.41 24,800.71 5,343.41 5,969.51 18,888.87 35,779.18 11,604.58 54,306.05 24,653.69 13,284.37 41,209.88 39,727.01 8,539.18 41,165.33

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0.01875 Worth 0.01 Wright 0.04516 St. Louis City County Sales Tax Loss Total

$ $ $

2,554.63 11,860.44 910,254.68

$

6,769,380.76

Source: Sales tax rates are obtained from Missouri Department of Revenue’s Sales and Use Tax Rate Changes Report and the author’s calculations.

Table 4 also shows that Worth County, with a population of 2,150 inhabitants and a sales tax rate at 1.875 percent is expected to see county sales tax revenue decrease by more than $2,500 per year if higher cigarette excise tax is implemented. Population is the primary variable that accounts for the expected sales tax revenue decline; large population centers are expected to have the largest cigarette purchases. However, the county sales tax rate varies across counties. St. Louis City has the highest sales tax rate at 4.516 percent while Pulaski County has the lowest rate at 0.85 percent. Table 5 reports the ten counties with the largest expected sales tax revenue decline given the passage of Proposition B. Nine counties are expected to realize a sales tax revenue decline that exceed $100,000. Table 5 Ten Missouri Counties with Largest Expected Annual Decreases in Sales Tax Revenues with Proposition B Passing County Expected Annual Sales Tax Revenue Decline $1,866,987 $910,255 $482,190 $399,162 $226,014 $197,631 $131,198 $124,850 $113,048 $87,133 $4,538,468

St. Louis St. Louis City Jackson St. Charles Jefferson Greene Boone Clay Franklin Christian Total Sales Tax Decrease for 10 Largest Counties
Source: author’s calculations

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To put some perspective on the expected decline, it would be useful to know what the revenues are for some of these counties. For example, Governmental Activities Revenues are $660.5 million in 2011 for St. Louis County. Thus, the expected decline in sales tax revenues is 0.3 percent of the County’s budget. In Boone County, Government Activity Revenues are $47.7 million. The expected sales tax revenue decline is also 0.3 percent. Meanwhile, the Greene County budget is $34.5 million per year so that the expected sales tax revenue decline is nearly 0.6 percent of the county budget. The expected sales tax revenue decline is not a large fraction of county revenues, but in a period in which county budgets are struck by other declines, a decline in sales tax revenues will further stress these counties to maintain their programs. 5.1 Border Effects In the county-level analysis, Assumption 4 holds that the quantity of purchases is based on a perMissourian basis. In other words, the decline in cigarette purchases is distributed evenly among Missourians. Assumption 4 notably ignores the transaction cost borne by non-Missourians who purchase cigarettes in Missouri presently because the excise tax is low. Put another way, Kansans are unlikely to drive to Cole County (Jefferson City) to buy cigarettes. Rather, they will drive to Jackson County. If the cigarette excise tax increase is implemented, that flow of out-of-state purchases will stop as the Kansas excise tax will be lower than Missouri’s excise tax. One way to approach this is to alter the weight associated with each county’s cigarette sales. In the baseline model, the weight is the ratio of the county’s population to the state’s population. To compute the county’s share of the reduction in cigarette packs purchased in Missouri, I take the weight and multiply it by the state’s expected quantity of cigarette packs after the implementation of a $0.73 increase in the state excise tax. If a county’s weight decreases, for example, then the expected share of state’s cigarette purchased in that county will decline. In other words, that county will realize a larger share of the reduction in state cigarette purchases than its population would have predicted. To incorporate a change in county weights, I take as given the statewide expected quantity of cigarette packs purchased after implementing the higher state excise tax. This means that the county weights must continue to sum to one. If a county receives a smaller weight because it is on the border, then non-border counties must receive a larger weight. In this analysis, I construct a set of weights such that imposes three conditions: First, to address the sensitivity of price changes on cigarette purchases in counties that border Kansas, Nebraska, Kentucky

Page 19

and Tennessee, I construct a set of county weights that apply smaller weight to those border counties that are contiguous with those four states. Second, I construct those county weights so that the sum across all the Missouri counties is one. Third, approximately 25 percent of Missouri’s population is from the sixteen counties that border the same four states. In the baseline model, these sixteen counties account for approximately 25 percent of the decline in cigarette purchases by construction. In the border-sensitivity analysis, I construct the county weight such that 33 percent of the reduction in cigarettes purchased across the state falls upon those counties bordering Kansas, Nebraska, Kentucky, and Tennessee. In other words, these border counties will account for one-third of the expected 92-million reduction in cigarette packs purchased in Missouri. Table 6 reports the counties that are contiguous to at least one of the four states that will have lower cigarette excise taxes than Missouri if Proposition B passes. In addition, the population for each of these sixteen counties is included. Table 6 shows that there are nearly 1.5 million inhabitants in these sixteen counties. Missouri’s total population is slightly above 6 million according to the 2011 Census Bureau reports. Hence, the sixteen counties account for 24.8 percent of Missouri total population. To raise the cigarette purchases in the sixteen contiguous counties to 33 percent of total purchases, I modify the county weights for the border counties according to the following formula.

∑ Note that the first term is simply the population weight for a particular county, the ratio 99 divided by 115 is the proportion of counties contiguous to the four states with lower cigarette excise taxes if Proposition B passes, and the term k is a constant that is set so that the sixteen contiguous counties account for 33 percent of the cigarettes purchased in Missouri.9 Alternatively, the county weights for the non-contiguous counties is

9

The equation represents a modification to the county weight that is an additive constant. Note that this additive transformation to the county weight means that the smaller population counties will experience a disproportionate larger change to their county environment while large population counties will realize a disproportionately smaller change to their county weight.

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It is straightforward to verify that the sum of the modified county weights sum to one. By setting k = 0.00125, the fraction of cigarettes sold in the sixteen contiguous border counties accounts for 33 percent of total change in cigarettes purchased in Missouri. Table 6 List of Missouri Counties Contiguous to Kansas, Nebraska, Kentucky, or Tennessee County Atchison Holt Andrew Buchanan Platte Clay Jackson Cass Bates Vernon Barton Jasper Mississippi New Madrid Newton Pemiscott Total Population for 16 counties Population 5,569 4,814 17,196 89,666 90,903 225,161 676,360 100,052 17,008 20,963 12,327 118,435 14,306 18,783 58,414 18,174 1,488,131

Table 7 reports the expected sales tax revenue decreases for each Missouri county with the modified county weights. Note one consequence associated with the modified county weights, some smaller counties will see their expected sales tax revenue increase. Knox, Mercer, Schuyler, Scotland, and Worth counties realize a small expected sales tax revenue gain because they are away from the border. Holding the change in statewide cigarettes constant, and redistributing the losses toward the border counties, the arithmetic shifts the change in sales toward the non-contiguous counties, even resulting in some gains in small counties.

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Table 7 Expected Sales Tax Revenue Decreases by County With Proposition B Passing and Modified County Weights Decrease in Annual Sales Tax Revenue $ 13,108.52 $ 50,964.32 $ 50,874.55 $ 24,595.11 $ 24,093.10 $ 26,893.50 $ 29,859.87 $ 12,415.37 $ 7,712.48 $ 127,343.57 $ 83,489.85 $ 24,217.38 $ 5,638.08 $ 25,065.28 $ 30,744.63 $ 45,478.21 $ 3,765.40 $ 949.61 $ 103,106.67 $ 5,755.00 $ 3,634.30 $ 81,736.08 $ 2,728.11 $ 141,546.67 $ 10,090.18 $ 68,042.41 $ 14,191.13 $ 22,105.96 $ 3,260.97 $ 15,060.02 $ 3,276.10 $ 5,006.59 $ 6,850.04 $ 5,501.52 $ 17,178.18

County Adair Andrew Atchison Audrain Barry Barton Bates Benton Bollinger Boone Buchanan Butler Caldwell Callaway Camden Cape Girardeau Carroll Carter Cass Cedar Chariton Christian Clark Clay Clinton Cole Cooper Crawford Dade Dallas Daviess DeKalb Dent Douglas Dunklin

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Franklin Gasconade Gentry Greene Grundy Harrison Henry Hickory Holt Howard Howell Iron Jackson Jasper Jefferson Johnson Knox Laclede Lafayette Lawrence Lewis Lincoln Linn Livingston McDonald Macon Madison Maries Marion Mercer Miller Mississippi Moniteau Monroe Montgomery Morgan New Madrid Newton Nodaway Oregon Osage

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

107,650.84 8,976.17 1,216.40 194,161.70 5,096.42 3,168.13 10,996.38 4,526.09 55,331.16 8,456.01 21,261.92 5,503.26 503,656.90 91,781.38 221,002.94 76,951.68 (938.52) 19,498.81 29,186.31 32,084.68 7,959.47 53,463.62 4,879.22 4,851.41 22,953.46 9,344.74 6,966.17 4,546.32 17,003.47 (1,514.95) 12,612.96 49,258.30 10,295.03 24,508.58 8,210.37 9,908.31 30,984.70 49,086.71 11,787.88 3,897.61 10,034.65

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Ozark Pemiscot Perry Pettis Phelps Pike Platte Polk Pulaski Putnam Ralls Randolph Ray Reynolds Ripley St. Charles St. Clair Ste. Genevieve St. Francois St. Louis Saline Schuyler Scotland Scott Shannon Shelby Stoddard Stone Sullivan Taney Texas Vernon Warren Washington Wayne Webster Worth Wright St. Louis City Total County Annual Sales Tax Revenue Loss
Source: author’s calculations

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

4,494.72 38,248.47 16,842.12 23,644.51 22,264.82 17,370.51 105,445.39 16,668.68 22,960.03 141.32 6,862.40 12,977.98 17,455.58 1,090.93 8,817.86 393,842.27 1,512.81 16,802.71 48,090.74 1,857,889.14 18,961.71 (615.33) (30.50) 21,716.78 2,259.48 1,343.62 15,804.94 30,382.31 3,123.78 49,294.66 20,027.80 32,366.18 35,042.03 32,017.19 5,455.26 35,512.49 (3,227.74) 8,776.51 896,327.66 6,684,847.26

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In addition, other non-contiguous counties would see the decline in their expected sales tax decreases become smaller as the distribution of cigarette purchases in Missouri shifts away from the contiguous counties. For example, in the baseline model, St. Louis City is expected to see sales tax revenues decrease by more than $910,000 per year. In the modified border county model, the expected sales tax revenue decrease is smaller, declining by $896,000 per year. Table 8 reports the expected sales losses in the baseline and the modified border county models for the sixteen counties. Most of the counties contiguous to Kansas, Nebraska, Kentucky and Tennessee are small in terms of population. The nature of the modified border county weight affects these small population counties disproportionately. Consequently, Table 8 shows that the expected sales tax revenues Table 8 Expected Annual Sales Tax Loss Comparing Baseline Model to Modified Border Model Expected Annual Loss (Baseline) $18,525 $7,940 $7,812 $10,788 $62,500 $79,254 $124,850 $7,627 $482,190 $73,177 $15,865 $11,903 $32,390 $14,396 $79,208 $13,284 Expected Annual Loss (Mod Border) $50,964 $50,875 $26,894 $29,860 $83,490 $103,107 $141,547 $55,331 $503,657 $91,781 $49,258 $30,985 $49,087 $38,248 $105,445 $32,366

County Andrew Atchison Barton Bates Buchanan Cass Clay Holt Jackson Jasper Mississippi New Madrid Newton Pemiscott Platte Vernon
Source: author’s calculations

will decrease substantially more when the border effect is taken into account. For example, Andrew and Atchison counties are expected to see county sales tax receipts decline by more than $50,000 per year

Page 25

with a strong border effect. Compared with expected sales tax receipts with no strong border effect, expected county sales tax receipts fall by approximately $18,000 per year in Andrew and less than $8,000 per year in Atchison when no border effect is considered. If the distribution of expected sales tax losses is too heavily shifted to small counties, there is another way to look at things. Instead of county-by-county, suppose one is interested in the sum of the expected sales tax losses across the sixteen border counties. With no strong border effect, the expected sales tax losses total $1,041,709. With a strong border effect, expected sales tax losses total $1,442,895. Thus, with greater border sensitivity, expected sales tax losses in those sixteen border counties increase by about $400,000. It is possible to construct a variety of ad hoc distributions such that the extra $400,000 in expected sales tax revenues is distributed differently across the border counties. For example, Jackson County accounts for roughly 40 percent of the population in these sixteen border counties. Suppose one were to allocate the extra $400,000 in expected sales tax revenue decreases by population. Jackson County’s expected sales tax revenue decrease would be $482,000 per year with no border effect. In contrast, with a strong border effect and the distribution of expected sales taxes consistent with population centers, Jackson County’s expected sales tax revenue decrease would rise to $660,000 per year. 5.2 City Sales Tax Revenues With cities in Missouri also applying sales tax rates, a reduction in cigarette sales will also affect municipal sales tax receipts. Here, I use the baseline model developed for the county-level analysis to calculate expected sales tax losses at the city-level. Table 9 reports the expected decline in city sales tax rates and receipts for Missouri cities with population exceeding 20,000 inhabitants. The municipal tax rates range from 0.5 percent in Wildwood to 3 percent in Maryland Heights. The Baseline City model indicates that the expected decline in sales tax revenue is over $837,000 for Kansas City. Kansas City collects slightly less than $138 million in sales tax revenues so that the reduction accounts for about 0.6 percent of revenues from this source. Overall, seven Missouri cities (excluding St. Louis City) would see expected sales tax revenues decrease by more than $100,000. Springfield collects nearly $111 million in city sales taxes, so with a decrease in sales tax receipts equal to nearly $215,000 accounts for about 0.2 percent of sales tax receipts. The total expected annual decrease in city sales tax receipts across the 20 largest municipalities is $2.6 million.

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Table 9 Expected Annual Sales Tax Revenue Decreases By City With Proposition B Passing Decrease in Annual City Sales Tax Revenue $ 137,514 $ 115,558 $ 66,119 $ 46,180 $ 54,599 $ 214,784 $ 49,976 $ 31,020 $ 166,581 $ 837,688 $ 130,270 $ 51,455 $ 83,423 $ 16,483 $ 32,189 $ 100,542 $ 62,541 $ 53,307 $ 46,055 $ 24,790 $ 30,091 $ 24,622 $ 26,178 $ 52,227 $ 19,267 $ 67,244 $ 28,257 $ 11,254 $ 2,580,214

Sales Tax Rate 0.02 0.02375 0.0275 0.025 0.02 0.02125 0.015 0.02 0.0225 0.02875 0.0225 0.0275 0.02625 0.0125 0.02375 0.02 0.015 0.016 0.025 0.0075 0.01 0.015 0.015 0.03 0.01 0.03 0.02 0.005

Municipality Columbia St. Joseph Cape Girardeau Liberty Jefferson City Springfield Blue Springs Grandview Independence Kansas City Lee's Summit Raytown Joplin Arnold Sedalia O'Fallon St. Charles St. Peters Wentzville Florissant Chesterfield Hazelwood Kirkwood Maryland Heights Ballwin University City Webster Groves Wildwood Total for Largest Municipalities

Source: author’s calculations

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The point is that the loss may not be a sizeable portion of the sales tax receipts. However, the expected losses in the current economic environment are challenges for cities that see revenues decline and program cutbacks. 5.3 City and County Excise Tax In addition, many cities and both St. Louis and Jackson counties in Missouri impose an excise tax on cigarettes.10 Table 10 reports the decrease that would occur for selected city and county cigarette excise taxes if Proposition B passes. I have also divided the local political subdivisions into regions around the state. Table 10 uses the calculated expected change in cigarette sales from the baseline model. For the selected cities and counties included in Table 10, the range of excise tax is from $0.02 in Poplar Bluff to $0.10 in St. Charles, Kansas City, Lee’s Summit, and Columbia. Some of the most notable annual decreases are expected to occur in the St. Louis and Kansas City regions. Both St. Louis City and St. Charles would expect their cigarette excise tax receipts to decrease by more than $300,000 and $100,000 per year, respectively. Kansas City is expected to suffer the largest decrease in city excise tax, losing more than $700,000 in cigarette excise taxes per year if Proposition B passes. Lee’s Summit is expected to have their cigarette excise tax decrease by more than $140,000 per year. St. Louis County and Jackson County are expected to see excise tax receipts decrease by more than $500,000 per year each. Overall, the St. Louis and Kansas City regions expect excise tax receipts to decrease by $1.2 million and $1.5 million per year, respectively. Springfield and Columbia are the other Missouri cities that expect cigarette excise taxes to decrease by more than $100,000 per year. For the selected group of cities and counties with excise taxes included in Table 10, the total decrease in excise tax collections is $3.2 million per year. 5.4 Funds Harmed by Proposition B Three types of funds are harmed if Proposition B passes. In each of these three cases, receipts are expected to decrease precisely because the proposed $0.73 increase in Missouri cigarette prices induces a decline in the quantity of cigarettes purchased in Missouri. First, there is the set of funds to which the

10

In the case of St. Louis City, the baseline model underpredicts the initial quantity of cigarettes purchased while the baseline model overpredicts the initial quantity for Jackson County. For Fiscal Year 2011, the excise tax implies that 47.48 million packs were purchased in Jackson County. The baseline model assigns the quantity of cigarette packs purchased in Jackson County to be 58.7 million packs.

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Table 10 Expected Annual Reduction in Local Cigarette Excise Tax Receipts with Proposition B Passing Expected Annual Decrease in Cigarettes 4,880,440 1,009,541 806,709 15,323,895 Expected Annual Decrease in Excise Tax Revenues $341,631 $100,954 $40,335 $766,195 $1,249,115 $705,496 $86,482 $32,268 $140,189 $58,908 $518,902 $1,542,245 $122,367 $30,780 $153,147 $17,465 $5,224 $22,689 $166,482 $15,006 $13,430 $194,917 $3,162,113

City or County St. Louis Region: St. Louis City St. Charles City St. Peters City St. Louis County Regional Total Kansas City Region: Kansas City Independence Blue Springs Lee's Summit St. Joseph Jackson County Regional Total Southwest Region: Springfield Joplin Regional Total Southeast Region: Cape Girardeau Poplar Bluff Regional Total Central Region: Columbia Rolla Kirksville Regional Total
Source: author’s calculations

Excise Tax $0.07 $0.10 $0.05 $0.05

7,054,956 1,729,635 806,709 1,401,886 1,178,160 10,378,044

$0.10 $0.05 $0.04 $0.10 $0.05 $0.05

2,447,332 769,500

$0.05 $0.04

582,165 261,200

$0.03 $0.02

1,664,820 300,113 268,596 Statewide excise total

$0.10 $0.05 $0.05

current $0.17 state cigarette excise tax is dedicated. Second, there are sales tax receipts paid to the state, county and municipalities. Third, there are local cigarette excise taxes paid to counties and cities. Table 11 summarizes the expected annual decrease in each of the three types of harmed funds. By adding across the three types of harmed funds, the total expected decrease is $34.8 million.

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Table 11 Summary of Funds Harmed by Proposition B Type of Fund Dedicated Funds from $0.17 State Excise Tax State Sales Tax County Sales Tax Selected City Sales Tax Selected City and County Excise Tax Total Harmed Missouri Funds Expected Decrease in Fund (mil $)

$6.3 $16 $6.7 $2.6

$3.2 34.8

6. Analysis by Campaign for Tobacco Free Kids In a separate quantitative analysis, the Campaign for Tobacco Free Kids expected decline in cigarette packs is 157,615,632.11 Note that if one were to use the larger expected reduction in cigarette packs, the expected impact that Proposition B would have on state, county & municipal revenues is $67.7 million per year. The revenue declines are allocated on an annual basis as follows:

  

$18.8 million per year from existing funds = $10.0 million from the State School Money Fund + $4.4 million from the Health Initiative Fund + $4.4 million from the Fair Share Fund. $43.5 million per year in sales taxes = $27.5 million state + $11.6 million county + $4.4 million municipals. $5.4 million per year in local cigarette excise taxes.

Please refer to Appendix 2 for Tables detailing the $67.7 million per year revenue decrease.

11

Data prepared by Campaign for Tobacco Free Kids submitted by Robert L Hess, II to the Missouri State Auditor and included in the Fiscal Note preparation for the Prop B fiscal summary.

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7. Summary Missouri’s Proposition B seeks to add $0.73 to the state cigarette excise tax, raising the total state excise tax on a pack of cigarettes from $0.17 to $0.90. Additionally, Proposition B increases the escrow requirement for NPMs by $0.569 per pack. With a higher cigarette excise tax and NPM escrow requirement, cigarette prices will increase. Consumers will respond to the price increase by reducing the quantity of cigarettes purchased in Missouri. Some Missourians will stop smoking, other Missourians will reduce their in-state purchases and out-of-state consumers will reduce their purchases in Missouri. The results of this analysis are summarized as follows:

 

The expected quantity of cigarettes purchased in Missouri decreases from 521 million packs to 429 million packs per year; The expected revenues from the net, new excise tax is $299 million per year, and not $332 million, after transferring monies to hold existing funds harmless and additional costs are accounted for; These existing funds will suffer reduced funding, totaling $6.3 million per year: o Expected monies paid into the State School Money Fund will decrease by $3.3 million per year; o Expected monies paid into the Health Initiative Fund will decrease by $1.5 million per year; o Expected monies paid into the Fair Share Fund will decrease by $1.5 million per year; Cigarette purchases are subject to state sales tax and the state sales tax receipts are expected to decrease by $16 million per year: o Net General Revenue is expected to decrease by $11.4 million per year; o Sales tax receipts dedicated Education are expected to decrease by $3.8 million per year; o Sales tax receipts dedicated to the Conservation Department are expected to decrease by $500,000 per year; o Sales tax receipts dedicated to Parks and Soils are expected to decrease by $400,000 per year; Sales tax receipts collected by Missouri counties and cities are also expected to decrease: o Sales tax receipts collected by Missouri counties are expected to decrease by $6.7 million per year; o Sales tax receipts collected Missouri’s 20 largest municipalities are expected to decrease by $2.6 million per year; Excise tax receipts are expected to decrease as the quantity of cigarette packs decrease: o In the 15 cities and counties in Missouri in which the excise tax is applied against cigarette packs, the expected decrease statewide is $3.2 million per year.

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Thus, if Proposition B passes, tax revenues for state, county, and municipal coffers will decrease by at least $34.8 million per year.

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References Goolsbee, Austan and Joel Slemrod, (2004), “Playing with Fire: Cigarette Taxes and Competition from the Internet,” unpublished manuscript.

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Appendix 1 County Population Table County Adair Andrew Atchison Audrain Barry Barton Bates Benton Bollinger Boone Buchanan Butler Caldwell Callaway Camden Cape Girardeau Carroll Carter Cass Cedar Chariton Christian Clark Clay Clinton Cole Cooper Crawford Dade 2011 Pop 25,552 17,196 5,569 25,566 35,282 12,327 17,008 19,115 12,356 165,627 89,660 43,082 9,315 44,420 43,679 76,632 9,620 6,365 100,052 13,948 7,734 78,570 7,019 225,161 20,789 76,448 17,663 24,800 7,807 County Dallas Daviess DeKalb Dent Douglas Dunklin Franklin Gasconade Gentry Greene Grundy Harrison Henry Hickory Holt Howard Howell Iron Jackson Jasper Jefferson Johnson Knox Laclede Lafayette Lawrence Lewis Lincoln Linn 2011 Pop 16,749 8,313 12,767 15,676 13,548 31,974 101,938 15,168 6,786 277,214 10,228 8,866 22,219 9,628 4,814 10,204 40,655 10,656 676,360 118,435 219,480 53,439 4,126 35,636 33,209 38,620 10,155 53,076 12,566

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County Population Table (cont.) County Livingston McDonald Macon Madison Maries Marion Mercer Miller Mississippi Moniteau Monroe Montgomery Morgan New Madrid Newton Nodaway Oregon Osage Ozark Pemiscot Perry Pettis Phelps Pike Platte Polk Pulaski Putnam Ralls 2011 Pop 15,074 22,977 15,591 12,195 9,171 28,717 3,804 24,770 14,306 15,697 8,734 12,270 20,502 18,783 58,414 23,468 11,017 13,915 9,595 18,174 19,041 42,178 45,020 18,572 90,903 31,170 53,175 4,978 10,281 County Randolph Ray Reynolds Ripley St. Charles St. Clair Ste. Genevieve St. Francois St. Louis Saline Schuyler Scotland Scott Shannon Shelby Stoddard Stone Sullivan Taney Texas Vernon Warren Washington Wayne Webster Worth Wright St. Louis City 2011 Pop 25,346 23,230 6,588 14,143 365,151 9,641 18,124 65,577 998,692 23,280 4,381 4,828 39,136 8,432 6,280 29,807 32,263 6,659 52,736 25,936 20,963 32,515 25,076 13,475 35,439 2,150 18,716 318,069

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Appendix 2 Table 2A.1 Expected Annual Sales Tax Revenue Decreases By County With Proposition B Passing Using CTFK Elasticity Decrease in Annual County Sales Tax Revenue $ 27,672.61 $ 31,659.31 $ 13,570.16 $ 51,914.56 $ 47,762.64 $ 13,350.04 $ 18,419.52 $ 28,464.41 $ 21,744.85 $ 224,215.85 $ 106,811.15 $ 46,657.45 $ 20,176.14 $ 48,106.49 $ 59,130.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 82,991.82 13,022.98 6,893.24 135,444.36 15,105.57 16,751.72 148,908.66 15,203.04 213,366.57 22,514.32 124,188.83 33,475.55 47,001.84 14,796.10 36,278.06

County Sales Tax Rate 0.01 0.017 0.0225 0.01875 0.0125 0.01 0.01 0.01375 0.01625 0.0125 0.011 0.01 0.02 0.01 0.0125 0.01 0.0125 0.01 0.0125 0.01 0.02 0.0175 0.02 0.00875 0.01 0.015 0.0175 0.0175 0.0175 0.02

County Adair Andrew Atchison Audrain Barry Barton Bates Benton Bollinger Boone Buchanan Butler Caldwell Callaway Camden Cape Girardeau Carroll Carter Cass Cedar Chariton Christian Clark Clay Clinton Cole Cooper Crawford Dade Dallas

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0.015 0.01 0.01 0.01 0.01 0.0175 0.01375 0.01 0.01125 0.015 0.0125 0.01 0.015 0.025 0.025 0.009375 0.015 0.01125 0.00975 0.01625 0.025 0.02 0.01 0.01625 0.015 0.02375 0.0175 0.01 0.0075 0.02 0.01375 0.015 0.0166667 0.01125 0.0225 0.01 0.0175 0.015 0.1 0.0175 0.01

Daviess DeKalb Dent Douglas Dunklin Franklin Gasconade Gentry Greene Grundy Harrison Henry Hickory Holt Howard Howell Iron Jackson Jasper Jefferson Johnson Knox Laclede Lafayette Lawrence Lewis Lincoln Linn Livingston McDonald Macon Madison Maries Marion Mercer Miller Mississippi Moniteau Monroe Montgomery Morgan

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

13,504.37 13,826.56 16,976.98 14,672.37 34,627.58 193,196.53 22,586.88 7,349.18 337,748.04 16,615.26 12,002.26 24,062.99 15,640.57 13,033.81 27,627.12 41,277.22 17,310.54 824,053.85 125,057.53 386,254.43 144,684.99 8,936.85 38,593.49 58,443.24 62,737.71 26,119.73 100,591.52 13,608.87 12,243.76 49,767.80 23,216.77 19,810.63 16,553.56 34,987.81 9,269.33 26,825.71 27,113.24 25,499.58 94,588.50 23,254.54 22,203.50

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0.01 0.00875 0.01 0.01 0.0175 0.015 0.0125 0.01875 0.01 0.00875 0.02 0.01375 0.01 0.0075 0.02 0.02 0.01 0.015 0.01 0.015 0.01725 0.005 0.02 0.0125 0.0295 0.01625 0.02 0.0125 0.01 0.01 0.015 0.01 0.0175 0.0275 0.01625 0.015 0.01 0.02 0.025 0.01 0.01833

New Madrid Newton Nodaway Oregon Osage Ozark Pemiscot Perry Pettis Phelps Pike Platte Polk Pulaski Putnam Ralls Randolph Ray Reynolds Ripley St. Charles St. Clair Ste. Genevieve St. Francois St. Louis Saline Schuyler Scotland Scott Shannon Shelby Stoddard Stone Sullivan Taney Texas Vernon Warren Washington Wayne Webster

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

20,341.83 55,354.15 25,415.65 11,931.32 26,372.20 15,586.96 24,602.87 38,664.84 45,678.43 42,661.75 40,226.65 135,364.90 33,756.85 43,191.07 10,782.27 22,268.48 27,449.51 37,736.85 7,134.75 22,975.13 682,160.78 5,220.56 39,256.29 88,774.19 3,190,646.87 40,969.58 9,489.17 6,535.86 42,383.97 9,131.79 10,201.78 32,280.74 61,145.99 19,832.02 92,808.06 42,132.71 22,702.76 70,426.95 67,892.75 14,593.31 70,350.81

Page 38

0.01875 Worth 0.01 Wright 0.04516 St. Louis City County Sales Tax Loss Total
Source: author’s calculations

$ 4,365.81 $ 20,269.27 $ 1,555,608.94

$11,568,750.42

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Table 2A.2 Ten Missouri Counties with Largest Expected Annual Decreases in Sales Tax Revenues with Proposition B Passing Using CTFK Elasticity County Expected Annual Sales Tax Revenue Decline $3,190,647 $1,555,609 $824,054 $682,161 $386,254 $337,748 $224,216 $213,367 $193,197 $148,909 $7,756,162

St. Louis St. Louis City Jackson St. Charles Jefferson Greene Boone Clay Franklin Christian Total Sales Tax Decrease for 10 Largest Counties

Source: author’s calculations

Page 40

Table 2A.3 Expected Sales Tax Revenue Decreases by County With Proposition B Passing and Modified County Weights Using CTFK Elasticity County Sales Tax Rate 0.01 0.017 0.0225 0.01875 0.0125 0.01 0.01 0.01375 0.01625 0.0125 0.011 0.01 0.02 0.01 0.0125 0.01 0.0125 0.01 0.0125 0.01 0.02 0.0175 0.02 0.00875 0.01 0.015 0.0175 0.0175 0.0175 0.02 0.015 0.01 0.01

County Adair Andrew Atchison Audrain Barry Barton Bates Benton Bollinger Boone Buchanan Butler Caldwell Callaway Camden Cape Girardeau Carroll Carter Cass Cedar Chariton Christian Clark Clay Clinton Cole Cooper Crawford Dade Dallas Daviess DeKalb Dent

Decrease in Annual Sales Tax Revenue $ 25,058.33 $ 59,158.20 $ 49,965.74 $ 47,012.80 $ 44,494.80 $ 29,525.85 $ 34,595.34 $ 24,869.78 $ 17,496.66 $ 220,948.01 $ 124,604.54 $ 44,043.18 $ 14,947.59 $ 45,492.22 $ 55,862.16 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 80,377.55 9,755.13 4,278.97 155,664.13 12,491.30 11,523.17 144,333.68 9,974.49 227,520.41 19,900.04 120,267.42 28,900.57 42,426.87 10,221.13 31,049.51 9,582.96 11,212.28 14,362.71

Page 41

0.01 0.01 0.0175 0.01375 0.01 0.01125 0.015 0.0125 0.01 0.015 0.025 0.025 0.009375 0.015 0.01125 0.00975 0.01625 0.025 0.02 0.01 0.01625 0.015 0.02375 0.0175 0.01 0.0075 0.02 0.01375 0.015 0.0166667 0.01125 0.0225 0.01 0.0175 0.015 0.1 0.0175 0.01 0.01 0.00875 0.01

Douglas Dunklin Franklin Gasconade Gentry Greene Grundy Harrison Henry Hickory Holt Howard Howell Iron Jackson Jasper Jefferson Johnson Knox Laclede Lafayette Lawrence Lewis Lincoln Linn Livingston McDonald Macon Madison Maries Marion Mercer Miller Mississippi Moniteau Monroe Montgomery Morgan New Madrid Newton Nodaway

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

12,058.10 32,013.31 188,621.55 18,992.25 4,734.91 334,806.98 12,693.85 8,734.42 21,448.72 11,719.16 53,473.34 21,091.44 38,826.34 13,389.13 842,251.64 140,828.94 382,006.23 138,149.31 3,708.30 35,979.22 54,195.05 58,816.30 19,910.83 96,016.55 10,994.60 10,283.06 44,539.26 19,622.15 15,889.22 12,196.43 32,046.75 3,387.21 24,211.43 55,420.91 21,578.17 68,445.77 18,679.56 19,589.22 36,517.65 69,507.98 22,801.38

Page 42

0.01 0.0175 0.015 0.0125 0.01875 0.01 0.00875 0.02 0.01375 0.01 0.0075 0.02 0.02 0.01 0.015 0.01 0.015 0.01725 0.005 0.02 0.0125 0.0295 0.01625 0.02 0.0125 0.01 0.01 0.015 0.01 0.0175 0.0275 0.01625 0.015 0.01 0.02 0.025 0.01 0.01833 0.01875 0.01 0.04516

Oregon Osage Ozark Pemiscot Perry Pettis Phelps Pike Platte Polk Pulaski Putnam Ralls Randolph Ray Reynolds Ripley St. Charles St. Clair Ste. Genevieve St. Francois St. Louis Saline Schuyler Scotland Scott Shannon Shelby Stoddard Stone Sullivan Taney Texas Vernon Warren Washington Wayne Webster Worth Wright St. Louis City

$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

9,317.05 21,797.23 11,665.55 44,822.63 33,763.08 43,064.15 40,374.26 34,998.10 157,606.64 31,142.58 41,230.36 5,553.72 17,039.93 24,835.24 33,815.44 4,520.48 19,053.72 677,651.16 3,913.43 34,027.74 85,506.35 3,182,934.77 36,721.39 4,260.63 3,268.01 39,769.69 6,517.51 6,280.37 29,666.46 56,571.01 12,642.77 88,559.87 38,211.30 38,878.57 65,198.41 61,357.07 11,979.04 65,558.84 (535.95) 17,655.00 1,543,802.89

Page 43

County Sales Tax Loss Total
Source: author’s calculations

$11,497,090.63

Page 44

Table 2A.4 Expected Annual Sales Tax Loss Comparing Baseline Model to Modified Border Model Using CTFK Elasticity Expected Annual Loss (Baseline) $31,659 $13,570 $13,350 $18,420 $106,811 $135,444 $213,367 $13,034 $824,054 $125,058 $27,113 $20,342 $55,354 $24,603 $135,365 $22,703 Expected Annual Loss (Mod Border) $59,158 $49,966 $29,526 $34,595 $124,605 $155,664 $227,520 $53,473 $842,252 $140,829 $55,421 $36,518 $69,508 $44,823 $157,607 $38,879

County Andrew Atchison Barton Bates Buchanan Cass Clay Holt Jackson Jasper Mississippi New Madrid Newton Pemiscott Platte Vernon
Source: author’s calculations

Page 45

Table 2A.5 Expected Annual Sales Tax Revenue Decreases By City With Proposition B Passing Using CTFK Elasticity Municipal Municipality Sales Tax Rate 0.02 0.02375 0.0275 0.025 0.02 0.02125 0.015 0.02 0.0225 0.02875 0.0225 0.0275 0.02625 0.0125 0.02375 0.02 0.015 0.016 0.025 0.0075 0.01 0.015 0.015 0.03 0.01 0.03 0.02 0.005 Columbia St. Joseph Cape Girardeau Liberty Jefferson City Springfield Blue Springs Grandview Independence Kansas City Lee's Summit Raytown Joplin Arnold Sedalia O'Fallon St. Charles St. Peters Wentzville Florissant Chesterfield Hazelwood Kirkwood Maryland Heights Ballwin University City Webster Groves Wildwood Total for Largest Municipalities Decrease in Annual Sales Tax Revenue $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 235,009 197,486 112,997 78,920 93,308 367,062 85,407 53,012 284,683 1,431,593 222,630 87,935 142,569 28,169 55,010 171,825 106,882 91,101 78,706 42,365 51,425 42,079 44,738 89,256 32,927 114,920 48,291 19,232 4,409,539

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Table 2A.6 Expected Annual Reduction in Local Cigarette Excise Tax Receipts with Proposition B Passing Using CTFK Elasticity Expected Annual Decrease in Cigarettes 8,340,548 1,725,827 1,378,651 26,188,262 Expected Annual Decrease in Excise Tax Revenues $583,841 $172,583 $68,933 $1,309,413 $2,134,769 $1,205,679 $153,179 $55,146 $239,580 $100,668 $886,795 $2,641,047 $209,122 $52,602 $261,724 $29,847 $5,224 $35,071 $284,515 $15,006 $13,430 $312,950 $5,385,563

City or County St. Louis Region: St. Louis City St. Charles City St. Peters City St. Louis County Regional Total Kansas City Region: Kansas City Independence Blue Springs Lee's Summit St. Joseph Jackson County Regional Total Southwest Region: Springfield Joplin Regional Total Southeast Region: Cape Girardeau Poplar Bluff Regional Total Central Region: Columbia Rolla Kirksville Regional Total

Excise Tax $0.07 $0.10 $0.05 $0.05

12,056,793 3,063,582 1,378,651 2,395,798 2,013,368 17,735,891

$0.10 $0.05 $0.04 $0.10 $0.05 $0.05

4,182,446 1,315,061

$0.05 $0.04

994,910 261,200

$0.03 $0.02

2,845,148 300,113 268,596 Statewide excise total

$0.10 $0.05 $0.05

Source: author’s calculations

Page 47

Table 2A.7 Summary of Funds Harmed by Proposition B Using CTFK Elasticity Type of Fund Dedicated Funds from $0.17 State Excise Tax State Sales Tax County Sales Tax Selected City Sales Tax Selected City and County Excise Tax Total Harmed Missouri Funds
Source: author’s calculations

Expected Decrease in Fund (mil $)

$18.8 $27.5 $11.6 $4.4

$5.4 $67.7

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