Monday, August 11, 2008

Yes, taxes do affect consumer behavior

For all those who seem to think that raising taxes will not alter behavior, they should pay attention to what happens in states that try to fund health plans by taxing cigarettes. Guess what people do? As the WSJ writes today, they try to evade the tax. In Maryland they raised the tax to $2 a pack to fund health care plans and found that cigarette sales have fallen 25%. People travel to Virginia to buy cigarettes. And so Maryland politicians are trying to outlaw the free travel of consumers to buy a product in a different state.
The Maryland pols are so afraid this is true that they've made it a crime for residents to carry two packs of cigarettes that weren't purchased in the state. In other words, the state says it's legal to smoke, so long as you use cigarettes that the government can tax and thus become a financial partner in your bad habit. But if you dare to buy smokes across state lines, you can be fined.
Good luck with enforcing that law. Are they going to set up police barricades at the state border to make sure that no one is bringing back two packs? I thought that one of the motivations for our federal Constitution was to prevent one state from taxing another state's imports into that state. Barring those purchases entirely is an astounding reach of state power.

As the WSJ points out, politicians should beware of any economic plan premised on financing from tobacco taxes.
Members of Congress, please take note. Democrats are planning one more pre-election go at a $35 billion children's health program expansion (S-chip) funded by a 61-cent per pack tobacco tax increase. They justify the new levy as a "sin tax." OK, but if Americans don't start sinning a whole lot more, states and Uncle Sam are going to go broke.