Oregon Office of Economic Analysis

Last fall, Oregon voters passed Measure 108 at the ballot box, increasing tobacco taxes and establishing a new tax on inhalant delivery (vape/e-cigs). The changes went into effect at the start of this year. Right now we’ve only had a couple of months with the changes. To date it looks like the revenues are coming in roughly in-line with expectations*. In recent forecast reports we’ve dusted off the border tax framework when talking about the outlook. While used many times over the years here on the blog, it looks like we haven’t talked about it here since the Oregon Vice report and presentation which was nearly 4 years ago! So without further ado.

Today, Oregon sells 50% fewer cigarette packs than we did in the 1990s. This is due to a lower smoking rate (16% vs 25%) but also due to less consumption among smokers (the average smoker today smokes 0.5-0.75 packs per day, in the 1990s they averaged a full pack). Update: the rest of the post talks about taxes but there is certainly a broader societal change impacting tobacco trends as well, likely in part due to the studies on the health impacts of smoking, etc.

The literature generally shows that the price elasticity of demand for cigarettes is around -0.4, meaning a 10% increase in price results in a 4% decline in sales. The research also shows that tax increases work through both the overall smoking rate, and the smoking intensity to reduce demand.

As such, taxes matter. It can be hard to disentangle the impact of higher prices and taxes on smoking behavior from cessation programs because cessation programs are usually funded from the increased taxes. This has certainly been the case here in Oregon.

Additionally, taxes matter so much in fact that Oregon currently sells more packs of cigarettes than Washington even though they are nearly twice our population but they also do have a lower smoking rate (12%). The primary reason Oregon outsells Washington is cross border activity due to the $3.03 per pack tax in Washington and the (old) $1.33 per pack tax in Oregon. There is considerable money to be saved by buying in Oregon, especially with around 1 million Washingtonians living along the Oregon border.

Going back to 1980, Oregon has always had a lower cigarette tax than Washington and any time Washington raise their tax, sales fall there but hold steady or rise in Oregon. Due to this big cross border activity, a more appropriate price elasticity of demand for Oregon is larger than the overall literature suggests, possibly in the -0.7 range or so.

All of that standard material said, the changes Measure 108 made are very large from a historical perspective. The cigarette tax per pack was increased $2, going from $1.33 to $3.33. Oregon’s cigarette taxes are now higher than Washington’s, at least leaving to the side the impact of Washington’s retail sales tax (which has always existed). If historical patterns hold, Oregon cigarette sales will drop noticeably this year, while they will likely hold steady or decline more slowly across the river. Only time will tell just how much this change in tax policy impacts consumer behavior.

In terms of revenue, the new, additional $2 per pack is dedicated to health programs and tobacco cessation. The General Fund portion of cigarette revenues is down due to that weaker underlying sales forecast for the number of packs sold. But all told, total tobacco revenues for the State of Oregon will increase in the short-term due to the higher taxes, but are expected to resume their downward trend as fewer Oregonians use tobacco, and those that do use less. See our Table B.6 in Appendix B of our forecast document for the full breakdown of tobacco related revenues.

* Cigarette revenues are a little lower than expected these first couple of months, but generally within the range of noisy data. The initial inhalent delivery revenues are noticeably larger than expected but it is currently unknown just how much of that reflects current sales versus existing inventory that was carried over from previous months. But all told, again, within the realm of expectations. Our office will not be adjusting the long-term forecast due to the initial few months following a large change in tax policy. We will continue to monitor the data and should actual collections differ noticeably from the forecast in the year ahead, we will adjust the outlook accordingly.