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The discussion about raising taxes on tobacco in Montana, as proposed with Initiative 185, has revealed an interesting bit of information from the Tax Foundation – that 23.3 percent of all cigarettes consumed in Montana (in 2015) were “smuggled” cigarettes to avoid the state’s higher tobacco tax.

“This number is likely bolstered as a result of Montana’s location in the country close to some states with significantly lower cigarette tax rates. While Montana’s tax on a pack of cigarettes is currently $1.70, the rate in neighboring states: North Dakota at $0.44 per pack, Idaho at $0.57 per pack, and Wyoming at $0.60 per pack.

Should I-185 be implemented Montana will have the highest tobacco tax in the nation at $3.70. The next closest state in tobacco tax is Washington at $3.025, followed by California at $2.87.

To realize that more than a fifth of the cigarettes consumed in Montana are not paying the state’s tax and are acquired from outside the state is probably a surprise to many observers. But as significant as that may seem, it is sometimes worse in other states. More than half the cigarette consumption in New York, for example, are smuggled in from outside the state, according to 2015 data.

This cigarette smuggling issue is much larger than many people know, states the Tax Foundation.

“Sometimes this is as simple as stocking up when they are in another state, but often networks emerge to buy the products from people who move cigarettes across state lines (sometimes illegally), buying low and selling high.”

In expanding that “profit” margin by as much as $1.50 per pack over the cost in other states, Montana will surely incentivize more smuggling, potentially reducing quite dramatically the tax revenue the state already gets from tobacco sales.

The issue comes with I-185 initiative, which proposes Medicaid expansion as a ballot question for Montana voters on November 6. The initiative would extend the expansion of Medicaid eligibility in the state and would pay for this expansion, in part, by increasing cigarette and other tobacco taxes. Medicaid was originally expanded temporarily in Montana and is set to expire on July 1, 2019.

The tax increases in the initiative are projected to raise $74.3 million per year by 2023.

The Tax Foundation has criticized the idea of funding a large permanent program on such an unstable taxing source. The trend of tobacco use has been declining since the 1960s, and raising its price will probably decrease its use even more. It is a law of economics that when the price or cost of something increases less of it is purchased or consumed.

“Like most other states, Montana has seen momentary revenue spikes after a cigarette tax rate increase, followed by a quick revenue fall-off in years soon after.”

“While this is a fantastic trend for public health, it makes taxes based on cigarettes unstable for supporting government programs that are designed to be continued year after year. In the case of Medicaid, the pairing with cigarette tax revenues is especially problematic, as health-care costs are expected to grow, not shrink, over the next decade,” stated the Tax Foundation.

The Foundation also questioned another aspect of the inititative. “Finally, another area where this ballot language is particularly ham-handed is its inclusion of vapor products and e-cigarettes–which are generally considered far less harmful than traditional combustible cigarettes–at the same tax rate as burned cigarettes. In other states, policymakers have avoided taxes on vapor products or set them at very low rates to make using these products to quit smoking less expensive.”

The initiative proposes a new tax on e-cigarettes and vapor products in Montana, taxable at the new 83 percent of wholesale price rate.

The organization advised, “Supporters of extending Medicaid expansion in Montana would do best to address its funding through the legislative process in the spring, instead of through this ballot measure, which will create significant long-term issues.”