Posts Tagged ‘Tobacco Tax’

Sin Tax Economics Made Simple!

May 22, 2009

As a nice follow up to my previous post on the proposal to increase the tobacco tax, Americans for Tax Reform today provided a neat children’s guide to sin-tax economics:

It’s a fundamental principle of economics known to every freshman econ major: if you raise the price of something, demand for it will go down. Keep raising the price, and you’ll end up with less money than you started with. A concept so simple, even a child could understand it (see graph).

Yet such simple common sense continues to elude lawmakers, who seem to think they can just keep raising taxes and tap into an unlimited pool of cash.

Statistics released in Kentucky last week once again demonstrate the foolishness of such an approach. Kentucky lawmakers passed a whopping tax hike on alcohol and … tax receipts fell 55%. In fact, in the last year, consumption and wholesales tax revenue dropped by a whopping $1.75 million.

Of course, Kentucky legislators should have been aware of this – just look at the effects of revenue raising alcohol taxes in the past: the last time the federal government raised the distilled spirits excise tax, it took 11 years to bring in more revenue. And look at what happened with tobacco tax hikes. New Jersey raised the cigarette tax 17.5 cents in 2007. They collected $52 million less than they had projected and $22 million below what they collected before the tax hike. Maryland raised the cigarette tax $1, in 2007 sales dropped by 25% and there was a 254% increase in cigarettes illegally crossing state lines. When Arkansas passed a 56-cent tax hike on cigarettes in February, revenue projections were lowered by $14 million just one month after passage.

Hiking taxes hurts consumers and kills jobs – and doesn’t even raise revenue. There’s a good reason why friends don’t let friends hike taxes.

Tobacco Taxes & Budget Overspending

May 20, 2009

Raising taxes at any time is a bad idea. Raising them in the middle of a financial downturn however is economic suicide.

There are few things that economists can agree on – they disagree on pretty much everything! But on this one thing universal consensus exists – YOU DO NOT RAISE TAXES IN THE MIDDLE OF A RECESSION!

The reasons for this are rather obvious. Tax hikes hurt consumers (who have less disposable income), and businesses (as consumption drops). This leads to many businesses reducing their workforce, or even closing their doors. The economy contracts, and living standards fall. At a time when our unemployment levels are rising, with future increases to come as Gillard’s Job Killing Act 2009 comes into effect, now – more than ever – is certainly NOT the time to further burden business and drive up unemployment.

Thus is saddens me greatly that the Federal Parliamentary Wing of the Liberal Party is proposing to hike cigarette taxes instead of focusing on cutting Rudd’s wasteful spending. Let us make no mistake about this. The budget deficit is PURELY a result of Labor overspending – NOT external factors. As such, the response should be to cut spending – NOT introduce job killing tax hikes.

Increasing cigarette taxes will hurt the poorest Australians the most. It is an unfair, regressive tax. What’s more, countless retail outlets across the country will be hit hard by this. There is no doubt if enacted jobs will be lost – and this isn’t even getting into the descent into nanny state paternalism.

Furthermore, evidence in the US shows that tax hikes on cigarettes are a really dumb way to raise revenue. When New Jersey raised the cigarette tax 17.5 cents in 2007 they expected to bring in an additional $30 million. Not only did New Jersey not meet that target, but it ended up with a net loss of $24 million in total tax revenue from tobacco.  Maryland doubled the cigarette tax to $2 last year and cigarette sales dropped 25%, falling considerably short of projections leaving a gaping budget black hole. Much of this loss can be attributed to black market and online tobacco sales – not smoking cessation, and this is certainly an industry starting to thrive in Australia. In any event, if people do stop smoking eventually, what happens to the revenue stream then? You’ll need to raise other taxes to prop up this piece of spending.

The Liberal Party’s budget reply contained a number of good ideas. Chief among them was the creation of an impartial Parliamentary Budget Office, to provide independent advice to Parliament on fiscal matters – this is a great idea, and one I really hope is implemented. Unfortunately however, such good initiatives were overshadowed by this horrendous call for tax hikes.

With the economic vandalism Kevin Rudd is inflicting on the Australian economy, the Liberals pretty much have the free market vote locked up (unlike in 2007), so electorally such things probably won’t matter much. But that doesn’t negate the fact that it’s bad policy.

Raising taxes at any time is a bad idea. Raising taxes in an economic downturn is just policy stupidity. All believers in sound fiscal policy should oppose this tax.