Tuesday, January 30, 2007

Tobacco Trickle-Down

With all of the juicy topics regarding Governor Doyle's proposed cigarette tax (his flip-flop on raising the tax, whether the money will be used for health care, using taxes to regulate behavior of a legal product, etc.), it's no wonder most discussions of the plan fall into those categories.

However, despite what Doyle would have you believe, there are more people affected by the proposal than just the consumers paying the tax. Doyle's logic: people who purchase cigarettes will be the ones paying the tax, and will be the ones that need the health care in the future - plus, the higher taxes will convince more people to stop smoking, as lighting up will become cost prohibitive.

Forgotten in that whole equation is the fact that people who buy cigarettes have to get them from somewhere. They buy them from grocery stores, gas stations, and bars, all of whom make money off their sale.

In 2003, the Wisconsin Department of Health and Family Services reported that 387.6 million packs of cigarettes were smoked in the state. For argument's sake, let's say the average cost per pack was $1.50 (not counting the 77 cent state tax). That comes to $581 million in sales made by businesses in 2003 (a rough estimate, to be sure).

Let's say Doyle's program is wildly succesful and results in a dramatic 50% drop in cigarette consumption. Those are sales that are going to have to be made up by those grocery stores and mom and pop gas stations. Since you're smart, you may have already figured out how a small grocery store would make up the lost revenue from declining cigarette sales. They, of course, would raise prices on everything else: jelly would be a nickel more, diapers would go up a dime. So in essence, depressing sales of cigarettes (still a legal product), just pops prices up elsewhere. So it ends up being a tax on everyone, regardless of their smoking habits.

Additionally, as long as cigarette sales via internet are still legal, you can expect a huge jump in those sales in Wisconsin - especially since they are exempt from the tax. This would further damage local businesses, and not do anything to really keep cigarette consumption down. According to tobaccofreekids.org, internet sales accounted for 14% of the total tobacco market in 2005, and the trend is growing.

Another portion of Doyle's plan is confusing. If he's so convinced of the evils of tobacco companies, why does the State of Wisconsin Investment Board invest so heavily in them? According to the 2005 schedule of investments, the State retirement fund holds the following stocks:

British American Tobacco: 1.2 million shares, worth $23 million
Imperial Tobacco Group: 955,000 shares, worth $25.7 million
Japan Tobacco: 572 shares, worth $7.6 million

And those are just the ones with the words "Tobacco" in their names. Surely, there are many more that are subsidiaries of other companies.

What Doyle is doing, in essence, is taking on the tobacco companies, which state retirees have a financial interest in seeing do well. In fact, their retirement funds depend on it. Wouldn't the unions have a problem with this?

Finally, few people are pointing out that an increase on the cigarette tax is about as regressive as a sales tax can get. The poor and minorities buy cigarettes at a disproportionately higher level, so it really is a tax increase on those groups.

An excellent summary of tobacco use and taxes can be found in this Legislative Fiscal Bureau paper. It includes this interesting tidbit that explains how the Native American tribes figured into the current sales tax configuration:

The tax on cigarettes was converted from an occupational tax to an excise tax in 1983. This change allowed the state to impose the tax on sales of cigarettes made by Native Americans to non-Native Americans on reservations. Currently, the state has agreements with most Native American tribes through which Native American retailers purchase and sell only stamped (taxed) cigarettes. The state then provides a refund to the tribes of 70% of the tax paid on sales to non-Native Americans and 100% of the tax paid on sales to Native Americans (federal law prohibits states from imposing a cigarette tax on sales by Native Americans to Native Americans on reservations). The refund provision was enacted to encourage Native American retailers to sell only stamped cigarettes. Previously, unstamped cigarettes were sold on reservations, which raised concern regarding competition and the administration and collection of taxes for sales to non-Native Americans. The refund provision was enacted as part of the 1983-85 biennial budget.