Effect on Households of Proposed Sales and Cigarette Tax Changes
in Governor Riley’s 2003 Accountability and Tax Reform Package
Samuel Addy, Ph.D. and Ahmad Ijaz
Center for Business and Economic Research
The University of Alabama
Summary
Much of the discussion on Governor Bob Riley’s accountability and tax reform package
has centered on the income and property tax components because these two taxes are
expected to generate the bulk ($912 million) of the $1.2 billion that will be raised at full
phase-in with the package.1 Some sales tax changes and a cigarette tax increase will
bring in $233 million. Changes in insurance premium and deed and mortgage taxes will
generate about $50 million to make up the difference. This report presents the effects
of sales and cigarette tax changes on households at different levels of income and is an
addendum to a recently completed report on the macroeconomic impact of the tax
portion of the tax and reform package.
Consumer expenditure data for the Southern region in 2001 compiled by the U.S.
Department of Labor’s Bureau of Labor Statistics are used to make the estimates.
Alabama households will pay between $33 and $123 more cigarette and sales taxes
depending on income level (Table 1). Those with household income between $5,000
and $10,000 pay the least. Households with incomes less than $5,000 will pay $35
more. The additional tax then grows with income from $49 for the $10,000 to less than
$15,000 household income range to $123 for households with income of $70,000 and
over. These taxes are on average about 0.2 percent of annual expenditures for
households.
1
Laying the foundation for Greatness: Governor Bob Riley’s Plan to Invest in Alabama’s Future. June
2003. http://www.governorpress.state.al.us/downloads/03-06-12-Tax-Reform-Presentation.ppt
Cigarette and Sales Tax Change Effects
CBER, UA
August 28, 2003
Page 1 of 5
Introduction
On September 9, 2003 the citizens of Alabama will vote on Governor Riley’s
accountability and tax reform plan. Much of the discussion on the tax plan has been on
the income and property tax components because they form the bulk of expected new
revenues. The Public Affairs Research Council of Alabama (PARCA) and the
Governor’s office have analyzed and made available the effects on income and property
taxes for taxpayers for various income levels and property values; tax calculators are
available on their websites.
The following analysis looks at the effects of changes in the sales tax for specific
products and services and an increase in the tax on cigarette and tobacco products.
Consumer expenditure data for the Southern region in 2001 compiled by the U.S.
Department of Labor’s Bureau of Labor Statistics (BLS) are used for the analysis.
Actual effects on Alabama households will therefore be slightly different from the
estimates reported here, but not by much. The sales tax changes affect auto sales, car
rentals and leases, automobile maintenance and repair, lubricating oil, and home
maintenance and repair. The study estimates the effect of these tax changes on
Alabama households at different levels of income. The specific tax changes are:
•
A $0.145 increase in cigarette taxes per pack and a 100 percent increase in the
tax for all other tobacco products
•
An increase in sales and use taxes on automotive vehicles from 2.0 percent to
2.5 percent
•
An increase in rental and leasing tax on automobiles from 1.5 percent to 3.0
percent
•
A new 4.0 percent sales and use tax on installation and repair services on
tangible personal property excluding items already taxed or exempted
•
Elimination of the $0.06 per gallon excise tax on lubricating oil and making it
subject to sales taxes.
Cigarette and Sales Tax Change Effects
CBER, UA
August 28, 2003
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Analysis, Results, and Discussion
Table 1 shows the expenditure components that are affected by the above-mentioned
tax changes as well as the results for nine household income categories. The income
categories range from less than $5,000 to $70,000 and over as reported by BLS. The
top three income levels spend less than they earn and the others spend more than they
earn. Transfer payments or other government welfare and service programs, gifts from
family and friends, help from many charities, and borrowing often make up the
difference for the lower six income categories. In general, expenditures increase with
income and thus, higher income households will pay more in absolute terms.
To estimate the effects of the tax changes on households, the cigarette and sales tax
changes are applied to the selected expenditures in Table 1 with some assumptions.
For the cigarette tax, it is assumed that the corresponding spending is on $3.26 per
pack for cigarettes. Currently, parts for repair and installation are taxed but labor is not.
It is therefore assumed that half of vehicle maintenance and repairs, and a quarter of
home maintenance, repairs, and insurance spending will be affected by the proposed
tax changes. Insurance is taken to be about half of home maintenance, repairs,
insurance, and other expenses. Lubricating oil is assumed to be 10 percent of gasoline
and motor oil expenses. These assumptions imply that the estimated effects may be
over or under by some margin. However, this is a good start at quantifying the effects
of these other taxes.
On the whole, Alabama households will pay between $33 and $123 more cigarette and
sales taxes depending on income level. Those with household income between $5,000
and $10,000 pay the least although the lowest income category, less than $5,000, will
pay $35 more. For the remaining households, the additional tax grows with income
from $49 for the $10,000 to less than $15,000 income range to $123 for households
with income of $70,000 and over. These taxes are on average about 0.2 percent of
annual expenditures for households.
Cigarette and Sales Tax Change Effects
CBER, UA
August 28, 2003
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Table 1. Effects of Proposed Changes in Cigarette and Sales Taxes on Alabama Households
Money income before taxes
Average annual expenditures
Less than
$5,000
$5,000 to
Less than
$10,000
$10,000 to
Less than
$15,000
$15,000 to
Less than
$20,000
$20,000 to
Less than
$30,000
$30,000 to
Less than
$40,000
$40,000 to
Less than
$50,000
$50,000 to
Less than $70,000 and
$70,000
over
$1,853
$7,648
$12,409
$17,340
$24,490
$34,411
$44,349
$58,370
$112,462
$17,441
$15,057
$20,406
$23,823
$27,547
$34,425
$41,148
$48,058
$73,796
Selected expenditure
Tobacco products and smoking supplies
Vehicle purchases (net outlay)
$256
$252
$298
$342
$363
$349
$474
$398
$322
$1,189
$1,336
$2,490
$2,643
$2,495
$3,809
$4,536
$5,083
$7,511
Vehicle rental, leases, licenses, other charges
$147
$77
$154
$214
$193
$312
$361
$566
$945
Vehicle maintenance and repairs
$247
$235
$380
$397
$521
$640
$718
$799
$1,028
Gasoline and motor oil
$671
$541
$731
$953
$1,086
$1,342
$1,550
$1,690
$2,060
Home maintenance, repairs, insurance, other
expenses
$302
$349
$455
$574
$630
$707
$683
$1,020
$1,530
Increases in Cigarette and Sales Taxes
Cigarette and tobacco products
$11
$11
$13
$15
$16
$16
$21
$18
$14
Auto sales
$6
$7
$12
$13
$12
$19
$22
$25
$37
Auto rental, lease, etc.
$2
$1
$2
$3
$3
$5
$5
$8
$14
Auto maintenance and repairs
$10
$9
$15
$16
$21
$26
$29
$32
$41
Lubricating oil
$5
$4
$6
$8
$9
$11
$12
$14
$16
Home maintenance and repairs
$6
$7
$9
$11
$13
$14
$14
$20
$31
$35
$33
$49
$55
$61
$75
$90
$96
$123
Total Increase in Cigarette and Sales Taxes
Note: The above estimates are based on consumer expenditure data for the entire South in 2001. The U.S. Bureau of Labor Statistics defines the South to cover
Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South
Carolina, Tennessee, Texas, Virginia, and West Virginia. It is assumed that 10 percent of gasoline and motor oil, half of vehicle maintenance and repairs, and
a quarter of home maintenance, repairs, and insurance spending will be affected by the proposed taxes. For increases in cigarette and tobacco products tax, it
is assumed that spending is on $3.26 per pack for cigarettes.
Source: U.S. Bureau of Labor Statistics and Center for Business and Economic Research, The University of Alabama.
Cigarette and Sales Tax Change Effects
CBER, UA
August 28, 2003
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The individual tax change effects follow.
Cigarette and Tobacco Products. The result is an $11 to $21 increase per household
depending on the level of consumption. At income levels of less than $5,000, these
taxes will go up by $11 annually while for households with income of over $70,000 they
will increase by $14. Interestingly, the $40,000 to less than $50,000 income group
spends the most on these products and will pay the high-end estimate of $21.
Auto Sales. The effect ranges from $6 more for the lowest income households to $37
more for the highest income households with an average of $19.
Auto Rental, Lease, etc. This tax increase has the lowest effect on households. It
ranges from $1 for the $10,000 to less than $15,000 income level to $14 for households
with over $70,000 in income.
Auto Maintenance and Repairs. On average, households will pay $25 more per year.
The range by income is from $9 for the lowest income households to $41 more for the
highest income households.
Lubricating Oil. The effect is a payment ranging from $4 to $16. The lowest income
households actually pay $5 more.
Home Maintenance and Repairs. This increases sales tax payments by $6 for the
lowest income households to $31 for the highest income households.
Cigarette and Sales Tax Change Effects
CBER, UA
August 28, 2003
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