Recently, Gov. Kim Reynolds pledged her support of raising Iowa’s cigarette tax by roughly 68%. For many policymakers, raising sin taxes is an easy target when facing a tax revenue shortfall. However, by raising the cigarette tax, Iowa could face a larger revenue issue moving forward.
The primary concern when raising the cigarette tax is the loss of revenue to border states. Currently, Iowa benefits from having a lower cigarette tax rate than Minnesota, Wisconsin, South Dakota and Illinois. Consumers on the borders of those states often come to Iowa to save money on their preferred pack of cigarettes. While here to buy cigarettes, many will also buy items in our members’ gas stations and convenience stores and purchase ethanol blended gasoline from Iowa gas stations and convenience stores. If Reynolds’ tax increase went into effect, this business and tax revenue dries up.
Not only will Iowa lose tax revenue from residents of bordering states, but Iowans will begin crossing the border to purchase cheaper cigarettes, fuel their vehicles, and purchase convenience items. At a tax rate of $2.01, Iowa cigarettes will become more expensive than cigarettes in South Dakota, Nebraska and Missouri…