Archive for Wednesday, July 25, 2007

Legal plunder’ has consequences

July 25, 2007

Congress has once again decided to take aim at "Big Tobacco." As an industry, they have become a favorite target in recent years. After raising the federal excise tax on cigarettes to 39 cents per pack in 2002, some revenue-hungry members of Congress are looking for even more cash. A new proposal being floated in the halls of Congress would raise the federal cigarette tax by 61 cents per pack--bringing the federal excise to $1 per pack. That is a 156 percent increase!

In any system of democracy, there is a recurrent threat that the majority will punitively tax a politically unpopular minority. This cigarette excise tax increase is a very clear manifestation of that threat.

There are, of course, other examples of politicians singling out a specific industry as a revenue source. One needs to look no further than the vilification of oil industry profits. We have seen proposals at the state and federal levels to impose a "windfall profits" tax to punish oil and gas companies for so-called evil profits.

As legendary French economist and philosopher Frederic Bastiat would say, this government-sanctioned confiscation is nothing more than "legal plunder." Unfortunately, with politically charged topics such as these, it is easy for some public policy leaders to lose sight of basic economic realities.

The result of this policy aimed at "Big Tobacco" is clear: The excise tax affects not the company but specific groups of real people. But smoking is widely disapproved; why not punish all involved, it might be said. However, there are significant public policy problems associated with this line of reasoning.

Government interference in a specific activity, such as smoking, unavoidably interferes with the normal function of the marketplace and is likely to have a grievous effect on small businesses. For instance, cigarette revenues at convenience stores totaled $45.9 billion in 2005, accounting for 35 percent of all in-store sales. This industry would be hit hard by the proposed cigarette tax. In fact, the proposed increase is forecast to cost our economy 12,000 jobs.

The unintended consequences of the tax increase are also troubling. A rise in the price of cigarettes through the federal tax will necessarily increase the incentive for tax evasion. Consumers will have a greater incentive to purchase their cigarettes over the Internet, or even through the black market. Foreign producers would realize a greater incentive to smuggle contraband products into our domestic markets. Neither development is desirable.

The proposed federal tax on cigarettes will also undoubtedly hurt state revenue. It is estimated that the 61-cent per-pack tax increase would cost the states $1 billion a year in lost tax revenue and Master Settlement Agreement (MSA) funds. This represents roughly 5 percent of all tobacco revenue in the 50 states. If this legislation is successful in Congress, the state of Kansas is projected to lose $14.1 million in revenue alone.

Politically, this tax is an easy sell because it targets a fraction of society and involves a socially unpopular activity. It is, however, strikingly bad public policy.

-- Jonathan Williams is a Tax Policy Fellow with the Kansas-based Flint Hills Center for Public Policy and and Director of Tax and Fiscal Policy at the American Legislative Exchange Council (ALEC). He can be reached at Gerriet Suiter is a research assistant with the American Legislative Exchange Council.

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