California’s political class has an insatiable appetite for directing the daily lives of Californians, for growing government, and for increasing tax revenue. The Legislature and the activist interest groups, who are mostly funded with tax dollars, are worse than heroin or crack cocaine addicts when it comes to their addiction to ordinary citizens’ money. Over the past few years, the political know-better class has put two initiatives on the California ballot to save the children by raising cigarette taxes. Both of those narrowly failed, the most recent was Prop 29 last year, which failed by about ½ percent when all the votes were counted.
Does raising the cigarette tax reduce smoking? In all likelihood, yes, by a marginal amount and the anti-tobacco folks will be happy to produce studies that “prove it”. Those studies don’t generally look at a couple of factors though. They avoid looking at people who switch from cigarettes to other forms of tobacco, and they never look at the impact of smuggling cigarettes from lower-tax (or no-tax) jurisdictions.
It’s the smuggling aspect of a huge tax increase that should be the greatest concern, and a $2.00 per pack tax hike is about a 33% increase in the cost of a pack of cigarettes. The Know-Betters will wordsmith this all day long with references to a “small” increase or point to the fact that the state’s cigarette tax hasn’t increased since 1998. Gotta keep up with inflation you know.
Another thing to watch out for is the estimates of tax revenue generated by a tax increase. Know-Betters tend to be strong on their ability to make moral judgments, and they tend to know nothing about either economics or math. Estimates of new tax revenue are typically made by multiplying the current sales of a commodity by the tax increase. There are two problems with this exercise in arithmetic, first, as price goes up consumption goes down; second, as price goes up consumption switches to a lower cost alternative. Both have the effect of lowering actual taxes collected. The second, alternative purchases – in the case of cigarettes – are cigarettes smuggled from out of state with lower tax cost.
Let’s take a quick look at the poster city for both Know-Betters and taxes. New York State & City.
New York has the highest cigarette tax rate of any state, and nearly two-thirds of the state’s cigarette market is illegal, announced the think tank Tax Foundation on Thursday. The Tax Foundation said that 60.9% of cigarettes sold in New York State are smuggled in from other states. This makes New York the biggest importer of black market cigarettes… … a report issued last month by the New York Association of Convenience Stores, estimating that “chronic cigarette-tax evasion” deprives the state of at least $1.7 billion in tax revenue and 6,700 jobs.
This issue is being looked at in California according to SFGate.
According to a study released last month by an affiliate group of the California Chamber of Commerce, a $2 increase would double smuggling rates in the state to almost 40 percent of cigarettes consumed. The group, California Foundation for Commerce and Education, estimated that the Bay Area alone would lose $4.7 million in local sales tax revenue and 2,900 retail jobs if cigarette smuggling increased.
The Know-Betters are dismissing the reality of these studies because they’re doing it for the children. And, of course, to “help” those who don’t know better. Diversity is a wonderful thing. This initiative is very similar to legislation, currently on hold, drafted by state Sen. Kevin de León, D-LA, who will take it up again when the Legislature reconvenes. Those who Know-Better, never give up because it’s for our own good. Some people do understand the law of unintended consequences though.
ATF estimates that smugglers could net up to $23,000 on a carload of 10 cases of cigarettes, particularly on the East Coast where neighboring states have drastically different tobacco taxes. The revenue is sometimes used to fund other criminal activities, the ATF wrote in a report on cigarette smuggling this year. “That’s part of what happens when you start increasing taxes,” said state Senate Republican Leader Bob Huff, R-Diamond Bar (Los Angeles County). “There are people who believe a tax solves all problems. It creates more problems than it solves.”
There was a solid coalition of groups who opposed Prop 29 last year, look for them to take up the cause again on this initiative, and support them. This is an important issue even if you don’t smoke. As we give the government more and more control over our daily lives we lose our freedom. One day we may even wake up and discover that the Know-Betters are telling us what kind of medical insurance we should have.