Taxes

Baptists and Bootleggers, Tobacco Tax Edition

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In an op-ed for The Daily yesterday, I noted several potential problems with Illinois Gov. Pat Quinn's proposal to close a $700 million of the $2.7 billion hole in its Medicaid budget with an additional dollar-per-pack tax on cigarettes.

It's almost certain not to raise the amount of money that backers project. As I noted, one of the biggest reasons why is that increasing per-pack taxes creates greater incentive for smugglers to bring in cigarettes from nearby jurisdictions with lower cigarette taxes.

But it also encourages cigarette smokers to shift their behavior in other ways. As USA Today noted last week, a Government Accountability Office report from last month indicates that pipe tobacco and cigar sales have risen dramatically in conjunction with increases in per-pack taxes. Pipe tobacco sales, in particular, have skyrocketed, rising from 240,000 pounds at the beginning of 2009 to more than 3 million pounds toward the end of last year.

The GAO report did not include a figure for state-level losses, but it did estimate that the federal government failed to raise between $615 million and $1.1 billion in tax revenue between April 2009 and September 2011 thanks to shifting behaviors. As USA Today notes, Treasury qualified that these are not actually "losses," but instead "estimates of the revenue increases if Congress were to change the law to eliminate the disparities."

This market shift has created one of those not-so-odd couple agreements between cigarette companies and public health advocates, both of which agree that pipe tobacco should be taxed at the higher rate. Cigarette sellers are warning that the GAO's numbers are actually too low: USA Today reports that "Liggett CEO Ron Bernstein, whose company sells discount cigarettes that are taxed at the higher rate, said his company estimates the tax loopholes have cost the government even more." No doubt his concern for federal tax revenues is genuine, and the competitive advantage of pipe tobacco's lower tax rates never even crossed his mind.

USA Today also quotes Gregg Haifley, a representative of the American Cancer Society Cancer Action Network. Responding to the GAO's revenue loss estimates, Haifley says, "That's real money and a tax avoidance scheme Congress ought to be interested in stopping," He additionally warns, "It's also counterproductive for the public health benefit of tobacco taxes." It is somewhat surprising to hear someone from an organization like this express any concern about federal tax revenues whatsoever: If dramatically lower smoking rates are the ultimate goal, then the revenues from cigarette taxes should eventually dwindle along with tobacco usage. 

NEXT: Fat Americans Need To Be Poked and Prodded To Thinness

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  1. Pipe tobacco sales, in particular, have skyrocketed, rising from 240,000 pounds at the beginning of 2009 to more than 3 million pounds toward the end of last year.

    Did they factor out the growth due to hipsters’ increased fascination with pipes?

    1. I was smoking pipe tobacco before the tax increase.
      /hipster

      (true story)

      1. In a pipe, or for roll-your-own? I’m betting a lot of the extra pipe tobacco sales are going into home made cigarettes (since they jacked up the price of loose cigarette tobacco by some insane amount, no tax increases, my ass).

        I’ve thought of taking up a pipe, but I’d probably just start smoking cigs again. I do badly enough at that as it is.

        1. In an actual pipe, my buddies and I were just fucking around. I still have mine and go get some tobacco occasionally. I do smoke rollies as well but I use cigarette tobacco. Mostly I have weaned off with my e-ciagrette.

        2. since they jacked up the price of loose cigarette tobacco by some insane amount

          The tax increased 1700%. President Obama sticking it to those monocled fatcats in their penthouses and on their yachts smoking their Topps and Bugler.

      2. I used to smoke 15 years ago, and usually smoked Drum hand rolled. Back then, the heavy taxes were on machine rolled cigs, and Drum cost about half as much. Now that they’ve increased the taxes, the only reason I could see for buying Drum is that it’s better tobacco than the manufactured smokes.

        I can’t see any reason why someone would buy Bugler or Top as it is.

        1. Bugler and top are fucking nasty. Drum is a bit harsh as well. When I smoke I smoke Peter Stokkebye rollies which isn’t the cheapest but I don’t smoke much anymore. Still I get maybe 30-40 cigs out of pouch for less than double the price of a malboro pack, so considering the quality of the tobacco I think it is a good deal. Drum and especially Bugler and Top is still cheaper than machine packed here in Texas.

        2. Drum changed about 12 years ago and it hasn’t been nearly as good since. Instead of getting the stuff from Europe, they licensed the brand to an American company which created an inferior product.

          My absolute favorite cigarette tobacco was Three Castles.

          1. Too bad about Drum. Back when I smoked, it was still owned by Douwe Egberts and was really, really good tobacco.

            I guess the prices still vary a lot by state. I checked the prices here in FL, and there wasn’t much of a difference between hand / machine rolled.

  2. All taxes are a method of acquiring wealth without violence for the purpose of accruing power.

    1. acquiring wealth without violence

      Please tell me “without” was a typo or other brain fart.

      1. How about “usually without overt violence”?

        You can always see the violence inherent in the system if you know where to look.

        1. Or, “just a threat of violence is all that is usually needed.”

  3. A bit of a thread jack. Ron Paul in a three way race helps Romney. Now that is a surprise.

    http://www.rasmussenreports.co…..on_paul_13

    1. It’s a surprise because it different than all the other ones I have seen. Of course the one constant has been Paul getting between 12-15%. Seems pretty high.

      1. The polls are not adding up in a lot of ways. Consider this.

        Polls consistently show that more voters are identifying as Republican and fewer are identifying as Democrats.

        http://www.rasmussenreports.co…..san_trends

        And the latest poll puts Romney up by 10 points among Independents.

        http://www.cbsnews.com/8301-50…..kicks-off/

        Yet the race is listed as a dead heat.

        One of those things can’t be true. The only way for Obama to be that far behind among independents and still in a statistical tie with Romney is for there to be a whole lot more self identified Democrats than 2008.

  4. Tobacco tax debates are always fucked. They want to have it both ways. But you sort of have to pick one: do you want to depend on tobacco tax revenues to fund things, or do you want to discourage smoking? IF you are serious about the latter, you really should not depend on the former as a revenue source.
    Of course, it woudl be better just to let people make their own mistakes and/or trade-offs. No one is deceived about the dangers of smoking at this point.

    1. and therein you find the lie: plenty of people will concede that raises taxes on a product or activity will result in lower consumption of the product or less of the activity. Then there is income and other taxes tied to productivity; it’s as though those are exempt from the premise.

    2. Some people just don’t think it all the way through. I remember one time I was talking to a “progressive” who wanted a massive gasoline tax which, he figured, would simultaneously save us from global warming since folks would quit burning gasoline and also provide big money to build and maintain lots of new choo-choo trains.

      When I pointed out the obvious flaw in this idea, his face twisted into an expression that in other circumstances would make me think he needed more fiber in his diet. He spluttered impotently and then muttered something about having to research the issue, and then wandered off. Quite comical really.

  5. Did anybody notice that hookah fad a few years back?

    1. Was that a fad, or just more middle eastern people moving to the area?

  6. Look at this people trying to tax as much as they can. I believe we need to tax them to better help our community. They way I help is by providing free web pages like http://www.textme4free.com/ to break the system and also save money.

  7. We clearly need more smokers out there to help provide taxes for our anti-smoking initiatives

  8. When are these morons going to understand that stop smoking efforts actually INCREASE the cost of healthcare? A person uses most of their healthcare in their old age. The younger you die, the less of a burden you are on the system. If the government really wanted to cut health costs they should encourage obesity, heavy drinking and heavy smoking.

  9. Very briefly, the problem was created because Congress used new excise taxes to fund SCHIP. Thanks to Phillip Morris, the excise rate on RYO (loose cigarette tobacco) went up to a little more than $27/lb. Pipe tobacco went to $2.80/lb. But no one bothered to define the difference (and there are significant differences in moisture, cut width etc). Coming from the pipe tobacco side of things, we knew that this was an issue as soon as it happened and industry folks have been looking for a regulatory solution to define the difference.

    As an avid reason reader (and a guy that, yes, derives his income from the sale of pipe tobacco), I’d prefer that all the tobacco excise taxes return to something reasonable. Failing that, it’s unfortunate that it looks like the GAO’s solution is to screw a bunch of small pipe tobacco manufacturers when their original intent was to increase the taxes on loose cigarette tobacco.

    Incidentally, how does one get Peter Suderman’s (or anyone else at Reason’s) email address so that I can write lengthier clarifying remarks directly?

    1. reason.com/staff

      There’s a linky link top of page there

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