Tobacco Taxes and Unintended Consequences
Despite incontrovertible evidence…
[by Jon Coupal] 4/4/06

Why is it such a shock to the tax and spend crowd that people will actually change their behavior to avoid paying taxes? By its nature, taxation is a coercive act by government which demands strict obedience and which carries very negative consequences for noncompliance. Taxation inflicts economic pain. Even a child knows that government doesn't live on "contributions."

Given that taxation is viewed negatively by most rational people, it should be no surprise that most people, when given the opportunity to avoid taxation legally (and sometimes illegally), will do so. We see this at very small levels -- buying an expensive consumer item out of state or overseas -- and we see it at larger levels, such as when a major manufacturer will move out of a country or state where the tax and regulatory environment has grown hostile.

The failure to account for changes in human behavior as the result of changes in tax policy illustrates the difference between "static" and "dynamic" scoring of proposed legislation. Static scoring simply says if you have x amount of activity and you want to generate y amount of revenue, you apply a rate of taxation to that activity that gives you the revenue you need. For example, if you want to generate $250 million from California software companies, you would simply see how much revenue they produce and apply a rate of tax on that activity to put $250 million in the state's coffers. Of course, this mindless calculation ignores that software companies can move out of state.

Former Governor Pete Wilson learned the difference between static and dynamic scoring the hard way. His 1991 tax increases actually resulted in a loss of revenue to the state, not the increase he was expecting. As the result of that experience, he counseled Governor Arnold Schwarzenegger's first Director of Finance not to raise taxes to close the deficit for the simple reason that it doesn't work.

Despite incontrovertible evidence of the negative consequences of raising taxes, folks like Rob Reiner never let up. His latest scheme is to impose yet another tax increase on the "rich" to pay for universal preschool. Never mind that California already has one of the highest effective income tax rates in America. Never mind that many professional athletes, entrepreneurs and entertainers have moved out of California to avoid -- legally -- this state's crushing tax burden. (Someone ought to calculate the loss of revenue to the state simply from losing Venus and Serena Williams and Tiger Woods to other states. No doubt it is in the millions).

Fortunately, as far as Rob Reiner is concerned, former Legislative Analyst Bill Hamm has completed a study showing that the general fund will take a huge hit from this tax increase. The question is whether voters will understand the consequences.

Which brings us to the next dumb idea du jour: Increasing California's tobacco tax another $2.60 per pack. A group of hospital executives (whose motto is tax everybody but us) wants more money for public health care and is collecting signatures for a ballot measure to impose the higher excise tax. But, for the moment, let's skip the notion that health care is good and smoking is bad. Let's think about the consequences.

First, an increase in the tobacco tax of $2.60 per pack is a 300% increase over what this excise tax is currently. That seems a little steep to us, even for tobacco. Second, do smokers have options? In other words, in the lingo of "static" and "dynamic" scoring, can we reasonably anticipate smokers will change their behavior to avoid the tax?

You bet your sweet assessment.

First, smokers can cut down on their smoking which, from the smoker's perspective, is probably a good thing. (Contrary to what we are told, anti-smoking activists like Reiner thrive on tobacco tax revenue so this would be a negative to them). Second, this magnitude of increase would create a differential with California's border states by at least $2 per pack. California visitors to Las Vegas will undoubtedly be coming home with more than a hangover and fond memories. (The saying "what happens in Vegas, stays in Vegas" has no application to tobacco products).

Third, smokers who don't like to travel far can go to their computers and order cigarettes online. The legality of these purchases is questionable, no doubt. But to deny that California will lose revenue because of tax avoidance behavior is naïve in the extreme.

Fourth, forget about marginally illegal purchases, let's talk about the real thing: Distribution of tobacco products by organized crime, gangs and, yes, even terrorist organizations. This is not mere speculation. Even as early as 2004, the U.S. Bureau of Alcohol, Tobacco and Firearms had 300 open investigations of al Qaeda and Hezbollah using bootleg cigarette revenue for terrorist activity. Did the hospital executives think of that when they came up with their latest brainchild?

The proponents of the new tax will decide soon whether to submit the signatures for their ballot measure. Let's hope they give some consideration to the consequences of their decision. To quote George Elliot, consequences are unpitying. CRO

copyright 2006 Howard Jarvis Taxpayers association

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