Local Taxation and Regulation Impacts the State Rae Ann Kelsch and Jennifer Mann

Topics Localities Adopting Taxes and Regulations Dillon and Home Rule – Local Control Local Tobacco Taxation Local Tobacco Regulation

Localities Take Action

Philadelphia Soda Tax 1.5-cent-per-ounce tax on sweetened beverages 24 times PA excise tax rate on beer1 Includes diet drinks Effective 1/1/2017 Expected to raise $72 million in revenue Originally pitched to fund pre-K education 1 Drenkard, S. Soda Tax Experiment Failing in Philadelphia Amid Consumer Angst and Revenue Shortfalls. Retrieved August 3, 2017, from https://taxfoundation.org/philadelphia-soda-tax-failing/

Philadelphia Soda Tax Results Will likely fall $6.7 million short of projections Just 49% of the soda tax revenues go to local pre-K programs1 20 percent funds government employee benefits or city programs Remainder funds parks, libraries and community schools Hurting low-income earners the most2 1 Drenkard, S. Soda Tax Experiment Failing in Philadelphia Amid Consumer Angst and Revenue Shortfalls. Retrieved August 3, 2017, from https://taxfoundation.org/philadelphia-soda-tax-failing/ 2 Gunlock, J. (2017, February 2). Philly’s Drink Tax Is Hurting Consumers, Businesses, and the Poor. Retrieved August 10, 2017, from http://www.nationalreview.com/article/444491/philadelphia-soda-tax-consumers-businesses-poor-hit-hardest

Local Tobacco Taxation

Local Control – Home Rule and Dillon Rule The U.S. Constitution does not mention local governments Local governments are creations of the state governed by state constitutions Home Rule – A municipality has the authority to tax and regulate unless expressly preempted or restricted Dillon Rule - A municipality may exercise only those powers expressly conferred by the state in statute

Tobacco Control Legal Consortium Home Rule and Dillon Rule – Tobacco Taxation

Cigarettes Taxed at the Local Level in 8 States Within these taxing jurisdictions the rates range from $0.01 to $3.00 per pack

Local Excise Tax States In total, for 2016 there were 615 sub-state taxing bodies for this type of tax These municipalities have raised more than $469 million dollars State Cities Counties Alabama 306 52 Alaska 12 Illinois 4 1 Missouri 128 2 New York Ohio Pennsylvania Virginia 105

Philadelphia and Pennsylvania Cigarette Taxes

Sequence of Events Pennsylvania legislators voted to give Philadelphia local authority to institute a cigarette tax in September 2014 Philadelphia instituted a $2/pack local cigarette excise tax in October 2014 Pennsylvania adopted a $1/pack cigarette excise tax increase in August 2016

Philadelphia Cigarette Tax $2-per-pack tax to fund city education Effective October 1, 2014 Any revenue shortfall to be backstopped by state City Controller's Office January 2017 report Predicts $26 million shortfall $5 million below the School District's budgeted projection of about $54 million

Philadelphia Cigarette Tax Results Philadelphia cigarette volume declined by 57% Pennsylvania cigarette volume declined by 4.9% Philadelphia cost the state more than 1.1 million cartons in the first year, or $17.9 million in revenue

Pennsylvania Cigarette Tax $1-per-pack tax Effective August 1, 2016 Pennsylvania cigarette prices were competitive with surrounding states prior to the tax increase

Pennsylvania Cigarette Tax Results Pennsylvania lost nearly 8 million cartons of volume to surrounding states and beyond Lost roughly $200 million in revenue Consumers either started crossing the border into Delaware and West Virginia, or stopped coming to Pennsylvania to purchase cigarettes

Pennsylvania Border Retail It’s clear that counties on the border adjoining states benefited from Pennsylvania’s cigarette tax increase

Local Tobacco Regulation

Local Government Authority over Tobacco  Advertising, Licensure, Smoke-free Indoor Air and Youth Access There are several areas where local government has taken action, I will focus on the tobacco industry. For specifics on other areas of local authority we suggest you reach out to your state’s Attorneys General’s office. Source: Centers for Disease Control

Restrict flavored tobacco products Increasingly, municipalities are adopting local regulations restricting tobacco products Reduce number of retail tobacco licenses Restrict tobacco sales near youth facilities Restrict tobacco coupons/discounts Increase tobacco purchase age to 21

Recent Local Activity Chicago, IL Flavored tobacco ban within 500 ft. of high schools Increase age of purchase to 21 Other tobacco product (OTP) tax San Francisco, Oakland and Contra Costa County, CA Flavored tobacco sales ban, including e-cigarettes Minneapolis and St. Paul, MN Flavored tobacco ban, including e-cigarettes

Menthol Cigarette Bans – California Case Study Menthol / flavored cigarettes make up 26% of California’s cigarette volume, or 219,526,060 packs If banned by all localities, the state would lose $630 million in revenue from lost menthol cigarette sales alone What if… Every California county banned menthol cigarettes No one crossed a border to buy menthol cigarettes No one switched to non-flavored cigarettes No one purchased menthol cigarettes online or illegally No one mentholated their own cigarettes

Conclusion

Conclusion Local taxation and regulation is on the rise Localities increasingly have a need to raise revenue Localities have the potential to negatively impact state revenue and the economy Many unintended consequences Potential for patchwork of tax and regulations pitting city against city Creates winners and losers for business Potential criminal tobacco trafficking / increased crime Creates food deserts when urban stores go out of business