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Cigarette Tax Increase Still Under Consideration

Sen. Sammuel Sanes pulled legislation to increase cigarette taxes from the Rules Committee agenda this week to do more analysis of its impact on V.I. businesses and government coffers, but it is still alive and will be considered further, according to Sanes.

The measure, [Bill 31-0023] increases the tobacco excise tax rate from its current 35 percent to 45 percent and allocates 5 percent of the tobacco tax revenues to fund the V.I. Council on Alcohol and Drug Addiction. Introducing it, Sanes said he hoped it would generate some much needed revenue for the cash-strapped V.I. government.

Finance Commissioner Valdamier Collens testified in support of the measure, saying that all things being equal, it would increase revenues by $443,000 a year. But he said raising the tax rate might reduce sales, lessening the increase in revenues.

Richard Berry, of Leeward Islands Management Company, which owns some V.I. wholesalers of tobacco, testified against the bill. Berry said, inaccurately, that the territory would receive less money from the 1998 Master Settlement Agreement with tobacco companies. (See Related Links below) And he said the territory would lose cigarette sales to St. Maarten, although no evidence was given to support that conclusion.

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Budget Director Nellon Bowry said he would like to see an analysis of the bill’s fiscal impact. Sanes agreed to ask the V.I. Bureau of Economic Research to conduct an analysis, which was completed May 4.

The BER analysis projects about $435,000 in new revenue per year, with $377,000 from new cigarette excise tax revenue and $57,000 in new gross receipts tax revenue.

Total excise tax revenue from cigarettes hovers in the range of $1.3 million a year, according to the report. [Fiscal Analysis of Bill 31-0023]

The study found that increasing cigarette prices has little effect on sales:

"Empirical studies show that the price elasticity of demand for cigarettes is around 0.4, which implies that a 10 percent increase in the tax rate on cigarettes is, on average, associated with a 4 percent reduction in cigarette consumption. This suggests that cigarettes are largely inelastic to price change," the report says.

The bill was sent out of the Finance Committee and the Rules Committee was scheduled to hear it Thursday. But Sanes pulled the bill and the hearing was canceled.

"The bill is not dead," Sanes said Wednesday. "There are some long-term concerns in reference to what would happen if indeed some people decided to buy somewhere else.”

He had hoped the bill would raise more than $2.4 million, and finding out that it was likely to only generate a few hundred thousand dollars each year prompted him to want to look even closer at the potential downsides, Sanes said.

"Any new revenue helps, that is true, but we do have to weigh the repercussions over the long-term," he said.

The Chamber of Commerce has some concerns about the bill, he said. "I understand their concerns and I am not the type to rush into anything. … In the final analysis, though the bill is not dead. I just have to make sure it does not hurt the tourism industry," he said.

After going over the BER analysis and talking to other economists and people in business, he plans to sit down with the Legislature’s post auditor for a final review of all the information, Sanes said. After that is done, if there is no compelling reason not to, he plans to move forward with the bill, he said.

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