Agriculture Update: Killing the Goose that Lays the Golden Egg
April 30, 2009
by: John Frydenlund

Government WasteWatch, Spring 2009

Hardly a day goes by without news of another major corporation either going completely out of business or announcing major layoffs, with both scenarios resulting in thousands of lost American jobs when the economy is already reeling.

Yet, one of the first orders of business of President Obama and the overwhelmingly Democratic Congress was to push through an unwarranted expansion of the State Children’s Health Insurance Program (SCHIP) mainly to families that already had coverage that they could afford.  The expansion of SCHIP was funded primarily through a massive 160 percent increase in the federal excise tax for cigarettes.  Obama and the Democrats also pushed through at least a trillion dollars in new spending, most of it through a so-called “stimulus” package that is supposed to turn the economy around and end all these layoffs.  The stimulus plan included “Buy American” provisions because that is supposed to help stimulate the economy, right?

The truth is that there is something incongruous about everything they are doing.  It doesn’t make a whole lot of sense to lament the loss of American jobs and then at the same time take actions that make it less likely that some of the few profitable corporations that still exist will remain so.  Imposing exorbitant excise taxes on cigarettes just because cigarette companies aren’t politically popular is counterproductive and actually downright stupid.  Does it really make sense in this economy for the government to single out a profitable industry and try to drive down their profits, making it more likely that tobacco companies will join the endless list of companies laying off employees?  I can only assume that somehow that will make Obama and the democrats happier.

“Buy American” provisions are equally counterproductive.  Such mandates will raise production costs, particularly in the steel-using manufacturing industries (which includes the auto industry that taxpayers are also bailing out).  Inevitably, this will result in more industries going out of business or laying off thousands of more employees.  It does make you wonder whether these people are stupid or whether they just want to drive this country into the ground.  Maybe they don’t know what they are doing, but President Obama and the Democrats in Congress are attempting to kill the goose that lays the golden egg.

In the case of cigarette excise taxes, the President and congress are not alone.  At least 30 states and even a few municipalities are considering increasing excise taxes on cigarettes this year.

While cigarette excise tax increases have proven politically popular across the country, time and again history has shown that raising excise taxes, in addition to disproportionately hurting the lowest-income Americans the most, does not produce projected revenue.  In fact, of the 57 excise tax increases that states implemented between 2003 and 2007, only 16 met or exceeded revenue targets.  As just one example, when New Jersey increased its cigarette taxes in 2006, instead of gaining a projected $30 million in revenue, the state lost more than $22 million.

If policymakers have half a brain, this shouldn’t come as a surprise.  Increased cigarette excise taxes promote purchases  through untaxed or lower tax venues and create incentives for contraband cigarette trafficking.  These venues may include Native American territories and the Internet, where state excise taxes may be avoided or evaded illegally.  Purchasers of cigarettes may also travel to adjoining states tih lower state and local excise tax rates to purchase cigarettes.  Ultimately, this can lead to short and long-term fiscal problems for state governments, especially when cigarettes are already a declining source of revenue.  It will also negatively impact legitimate cigarette retailers and wholesalers, causing further job losses.  Makes sense, doesn’t it?

The federal government and state and local governments should take into account what the ultimate effect of tax increases will be before they join the stampede to penalize politically unpopular businesses and force more job losses.