So the other day I was reading this post at The Daily Caller. The gist of the story was that increasing tobacco taxes decreases revenue. This should seem obvious to anyone who took ECON 101 in college: the higher the price, the less demand there will be for the product. Because, ya know, that’s how supply and demand works.
Yet America’s politicians keep piling on the taxes and end up amazed when the higher tax generates less revenue than the lower tax did before. The linked article cites a study by the National Taxpayers Union, which found that (among other things) a 2006 cigarette tax increase in New Jersey actually produced $52 million less than the lower tax did the previous year. And broke-ass Illinois approved a $1/pack increase last June… which led to 39% less revenue compared to the lower tax the year before. Total shortfall: $130 million.
Of course, it helps that neighboring states might have lower taxes. Illinois has Missouri on one side (which has a 17¢/pack tax, the lowest in the country) and Indiana on the other side (which has half the excise tax of Illinois). And, for much of Massachusetts, dirt-cheap smokes and booze are only a 30-minute drive to New Hampshire.
Believe it or not, of all the issues we disagree on, THIS has always been my main beef with the Democratic Party. Not cigarette taxes specifically, but how Democrats want to have it both ways.
Back in 1990, Congress passed the infamous “luxury tax”, which added a 10% surcharge to jewelry and furs over $10,000, cars over $30,000, boats over $100,000 and private planes over $250,000. The theory, of course, was that wealthy Americans could easily afford such taxes, and would happily pay them. Or, to put it in more economic terms, TAXATION WOULD NOT AFFECT CONSUMPTION.
So… what happened? It was a disaster for American boat and airplane manufacturers. Before passage, Congressional policy wonks had estimated that the luxury tax would generate $9 billion in revenue over 5 years. But in 1991, the first full year of the tax, government revenues from the luxury tax were a mere $3 million. Demand for new boats plummeted by 70%, and at least 7,600 people in the boating industry lost their jobs (other estimates are much higher: one source says 13,000 workers in Florida alone lost their jobs, and as many as 30,000 people in related industries lost their jobs, too). It’s almost certain that the federal government paid out more in unemployment benefits than they gained from the tax. At the same time, the “boat tax” helped make a bunch of Bahamians and Panamanians rich. I don’t know if the tax did not apply to purchases made outside the US, or if the tax was simply easy to evade with overseas purchases, but suddenly overseas boat salesmen were swimming in money, thanks to Democrats in Congress. Odd how the world works sometimes..
The tax was such a disaster that Congress repealed it in 1993. And you know a tax is a mistake when the New York Times (a bastion of right-wing thought if ever there was one) says so. But yet, that very same year, First Lady Hillary Clinton advocated raising the tax on cigarettes by as much as $2/pack, with the publicly stated goal of “reducing teen smoking”. Thus, TAXATION DOES AFFECT CONSUMPTION.
So Democrats… which one is it? Does taxation affect consumption or not? You guys might be surprised to find that Chief Justice John Marshall figured it out all the way back in 1819 in McCulloch v. Maryland:
“the power to tax involves the power to destroy”
Use that power wisely, folks.