Cigarette tax stamp program would pay for itself
With the American Samoa government losing hundreds of thousands of dollars in cigarette excise taxes to cigarette smuggling, a cigarette tax stamp program would be cost effective and could work in American Samoa, according to the feasibility study conducted by consultant Bryan M. Jackson.
The study was commissioned by the American Samoa Community Cancer Network following a May 2011 Territorial Audit Office report which found that cigarettes were likely being smuggled into American Samoa, and recommended that ASG implement a cigarette tax stamp program in order to control and prevent this smuggling. (See Monday’s edition for more details).
Among the issues addressed in the study is the cost of a tax stamp program in the territory. In recommending such a program, the study says that it should also determine whether or not such a program would be cost-effective.
In order to do so, the study says it is necessary to describe a source of funding to establish the program; describe the fiscal responsibilities of the parties involved in the program (i.e., cigarette vendors and ASG) and estimate the costs to the parties of fulfilling those responsibilities; and estimate how much additional revenue ASG could reasonably expect to gain from the program once it is an established a source of funding.
“This report strongly recommends that ASG form a Tobacco Enforcement Unit (TEU) whose primary duties would include inspection for and of tax stamps, as without enforcement activities a cigarette tax stamp alone does nothing to prevent cigarette smuggling,” it says. “The [main] source of funding for a TEU should be the Tobacco Master Settlement Agreement (MSA).”
The report estimates the cost of establishing a TEU at about $50,000 to $100,000 during the first year depending on the number of personnel and equipment deemed necessary to its operation.
According to the report, the two parties who would be involved in a tax stamp program are those cigarette vendors that first pay the cigarette excise tax and ASG.
The cigarette vendors would be responsible for affixing the tax stamps to the packs of cigarettes and this would require them to purchase tax stamping machines.
Although very sophisticated, automated machines are available that can stamp a very large number of cigarettes packs in a very short time, but these are very expensive and would not be necessary.
Due to the lower volume of tax stamps needed in American Samoa, hand-held stamping irons and/or manually operated stamping machines should be adequate, according to the report, which also provided pictures of the machines.
Cost of the machines in 2008 were $520 for the hand held iron and $5,500 for the manual stamping machine. In addition to these costs, the report noted that there will also be labor costs involved in affixing the stamps to the packs of cigarettes and such expenses would range from several hundred to several thousands of dollars per year depending upon the number of stamps to be affixed and the method used.
According to the report, cigarette merchants might also incur some minor administrative costs as well, but these would likely be nominal. It acknowledged that merchants would likely pass all of these costs on to consumers by charging higher prices for a pack of cigarettes.
As for ASG, the report says that in addition to costs incurred setting up the TEU—which is needed to enforce the tax stamp laws—ASG would incur the additional costs of printing the tax stamp and administrative expenses.
The report estimated the cost for printing each stamp at $0.02 and total printing cost would be around $68,679. ASG could elect to either absorb the cost of printing the stamps or pass them on to the wholesaler/retailer - who would likely pass it on to the cigarette consumer in the form of a tax stamp fee, which would be added on top of the excise tax.
For administrative cost, the report says this would vary depending upon whether its administration was handled by existing Treasury and/or Customs personnel, or it was found necessary to hire additional personnel.
“The simple answer to the question of whether or not a tax stamp program would be cost-effective... is: Yes, a cigarette tax stamp program likely would, at the very least, pay for itself,” the report says.
“In fact, as it is probable that ASG is losing hundreds of thousands of dollars per year in cigarette excise tax revenue to cigarette smuggling, by preventing the loss of that revenue a tax stamp program would be likely to more than pay for itself,” it says.
In addition to enhanced cigarette excise tax revenue, once the program was established and all the needed elements were in place (i.e., enforcement), ASG would also realize revenues from penalties assessed for selling cigarettes without the required tax stamps and any other tobacco law violations uncovered by a TEU— e.g., selling cigarettes to minors, selling without a license, etc.
At the very least, even a revenue-neutral tax stamp program would allow ASG to ensure that all cigarette excise taxes had been paid, as well as help improve public health by aiding efforts to reduce the high rate of smoking presently seen in the territory, according to the report.