State Considers a New Tobacco Tax

Yesterday the state House Finance and Health Care Committee considered a bill to increase taxes on tobacco products.  I’m always torn on these kinds of sin taxes. On the one hand they increase revenue, which is especially nice in light of the state’s $2.6 billion budget short fall, and they create incentives for people to quit smoking, which saves lives and lowers health care costs. On the other hand they’re terribly regressive taxes, which is especially atrocious in the state with by far the most regressive tax code in the nation.

Your thoughts?


14 Responses to “State Considers a New Tobacco Tax”

  1. I don’t believe taxation on tobacco saves lives (and alcohol either which usually comes next for taxation). People will try to get what they want despite the additional cost. I know someone who’s smoked all their life and still does while being on welfare. It’s also been shown that people tend to switch from one vice to another when cost is a factor. If tobacco is taxed enough, people may switch to marijuana!

  2. Josh Wittner Says:

    We’ll have to check out some studies on the effectiveness of tobacco taxes on smoker reduction, but it seems like a pretty straightforward application of economic principles. If things cost more some people will buy less of them, this reduces the chances of getting cancer from smoking which should extend and even save some lives. What I worry about is bad equilibriums where people switch from filtered to the cheaper unfiltered cigarettes, etc.

    I’ll have to look into vice substitution, but I don’t think people switching to marijuana (if it was legal) would be a bad thing. It’s certainly less carcinogenic than tobacco is and significantly less addictive. Either way though I think it makes logical sense to conclude that raising taxes on tobacco reduces tobacco usage and thereby is likely to save lives.

    I’m gonna see if I can track down some studies though.

  3. There wouldn’t be anything wrong with switching to marijuana. However, it is wrong to tax someone for something they enjoy putting into their body just because someone else thinks it’s bad for them. I think alcohol is worse than cigarettes (and also leads to more deaths), but it doesn’t mean I want others to be taxed for it because of my personal view.

  4. Josh Wittner Says:

    Let me preface this by saying that I’m not sure what my stance on tobacco (or sin in general) taxes is yet, but let me play devil’s advocate a little and bounce some opposing arguments that I’ve thought up off of you.

    We wouldn’t be levying a tax on tobacco because we think it’s bad for people, we’re levying a tax on tobacco because it is bad for people a the negative health effects of smoking are well known. This tax is then justified by the governmental goal of “promoting the general welfare” of the people.

    Also as the negative health effects of tobacco use are overwhelmingly seen in the later years of life and as the health needs of the elderly in this country are provided through Medicare, a government institution, and as tobacco smokers present a heavier burden on this government institution they should be taxed at a higher rate for those services provided later.

    I’m interested in your thoughts on these points, and while I think you’ll agree they do contribute to the justification of tobacco taxes, I wonder if you think they provide enough justification.

    Personally – as usual I’d like to see more numbers for all of these things to ensure that reality backs up what does appear to make logical sense. I don’t like that the taxes are regressive, but in this case the health effects argument seems to justify the regressiveness of the tax.

    Another question I have for you: What’s your general stance on drugs of all forms and whether they should be legal or illegal?

  5. On the longterm affects of tobacco, those same results can be applied to people who drink too much alcohol. On Medicare, to me it’s a good reason why there shouldn’t be such a program since in this context, it taxes everyone for other people’s unhealthy habits.

    To me they don’t provide enough justification since it only leads to more taxation.. on alcohol (which is already planned).. on fast food (which was done in California under transfats).. What next? Soda? Twinkies? Those are all bad for your health also.

    Promoting the general welfare is to help make things better. I don’t think forcing people to pay for their bad choices does that.

    My stance on recreational drugs is that all forms should be legal. If drugs were made available in pharmacies as products, people will be better informed about their affects instead of getting them off the streets in a ziplock bag not really knowing what they’re putting in their body. Not to mention the violence caused by prohibition.

  6. Josh Wittner Says:

    I agree that the same logic can be applied to alcohol, but that doesn’t require that we apply that logic to alcohol and not applying it to alcohol doesn’t invalidate the application of that logic to tobacco.

    As for Medicare, I agree with your fundamentals, however we must live in the world we inhabit and that means that Medicare isn’t going away anytime soon. If we accept that Medicare is here to stay, the logic of taxing those with greater health risks is still applicable.

    While thought provoking the slippery slope fallacy is just that, a fallacy. We can decide that it is justified to tax cigarettes, but not justified to tax sodas or twinkies.

    Forcing people to pay for certain behaviors creates a disincentive for those behaviors. In this case a disincentive to smoke, which will decrease the likelihood of smoking (presumably, again I prefer numbers) and thus increase the general welfare. That’s the idea at least.

    While the purist in me agrees that all drugs should be legalized, I’m not sure they should be made available to the public. Also, without proper consumer protections (such as the case with homeopathy, etc.) we see that the public isn’t well enough informed to make the logical decision. I suppose I can imagine a world where one had to pass a test showing that you’re well enough informed to get these products. I wonder if you would support such strong government intervention that would be required to ensure such consumer protection?

    Again let me state that I haven’t decided where I stand on sin taxes yet or on this particular tobacco tax.

  7. If the logic can be applied to both tobacco and alcohol and Medicare is valid, then why not apply it to junk food? Obesity has been shown to be an increasing threat to health, has it not? It will surely raise Medicare costs in the future! A couple years ago, I never would’ve thought junk food would be banned until transfats were in California.

    There is currently consumer protection with no need for government.. Consumer Reports, The Better Business Bureau, Kelly Blue Book, to name a few… even The James Randi Educational Foundation serves that purpose.

    So no, I do not support this kind of government intervention because there is no reason for it. We’re in the age of the Internet (now even available on our mobile phones!), I think people know how to inform and decide what’s good or bad for themselves. This includes you and I. I know I can decide for myself what’s good or bad for me, can you?

  8. Josh Wittner Says:

    While it may follow that if we should apply a tax to tobacco then we should apply a tax to junk food, it doesn’t follow that if we apply a tax to tobacco that we must apply a tax to junk food. It’s that reason that I don’t oppose a tax on tobacco simply because the same logic applies to junk food. However, I do agree that if we follow the logic thus far there are no real non-political reasons not to tax junk food, or at least that I can immediately recognize.

    There is a fundamental difference between consumer information services like Consumer Reports, The BBB, and the KBB and that of consumer protection services like the FDA. I think in the particular case of food and drugs it is reasonable and necessary that businesses be able to be held culpable for producing and distributing product thats are seriously damaging to consumer health and that’s only possible with government regulation. Some products and services are simply too dangerous and thus the damage too great if we rely solely on the free market cycle to remove them. It’s government regulations that require 3 phases of clinical trials before drugs can be marketed for a particular disease, not the free market. The free market gave us snake oil (placebos) for centuries and still does. I’m not saying that the FDA is a perfect organization or regulates perfectly, but I do believe it is a necessary and justified government service.

    Also Consumer Reports is a paid service, thus drastically limiting access to the poor and so is an inappropriate analogy to governmental consumer protection services.

    I don’t think that we can assume the internet is as ubiquitous as you imply. Many people cannot afford home internet access which limits them to the public library (a government service) or no access. Also consider the elderly population which is drastically less technically affluent. Another thing that your reliance on the internet implies is that before its invention you would have agreed that government regulation was necessary because information was more difficult to attain. I don’t think that you believe that. We certainly can’t rely on everyone having internet access on their phones, we can’t even rely on everyone having cell phones.

    Do I think I’m capable of deciding for myself what’s good or bad for me? In some cases yes, in others no. Food and drugs are perfect examples of where I’m glad that there are strict regulations, and they’re the specific topic we’re discussing. Do I trust my ability to buy a good car at a good price, or a quality Blu-Ray player? Yes, of course. Do I trust my ability to study the very complex nature of pharmaceuticals? Not usually and I’m glad that in most cases I don’t have to.

    I agree that over time the free market is self regulating, but not in all cases (snake oil) and certainly not when the data needed to make informed decisions is as vast and complex as it is with food and drugs.

    So now I’m curious. Do you believe that companies should be able to offer any product labeled for any purpose now matter how dangerous or inaccurate it is? Do you believe that the only regulation we need is the ability to sue companies for damages? What about products that can kill or seriously harm people, like drugs? I guess my real question is, what role do you see for government regulation of food and drugs, if any?

  9. I just watched a video recently, again on I’m sure you’re thinking it’s the only source I have by now, but they always seem to do a good job putting things into context. On the topic of regulating restaurants, Nick Gillespie points out:

    “Very few businesses do well by killing their customers or making them sick, this is not a good business model.”

    I think that sums it up pretty well for both food and drugs. Here’s the link if you want to check it out (Skip to five minutes in for that part):

    I really don’t understand how someone can put so much trust in politicians and bureaucrats to decide what’s right for us instead of people like you and me who decide to start a business and let others decide whether their product is good for them by paying for it and keeping them in business. If they’re product harms people, then they go out of business, lose all their money and even go to prison. And the justice system I do think government should have a role in.

  10. Josh Wittner Says:

    That quote is a perfectly accurate description of applied classical economics and it’s true, but the evidence seems to suggest that the tobacco and junk food industries are members of the “very few”. Tobacco is a perfect example of a product that kills its consumers, but due to its addictive properties and that the health damages aren’t immediately apparent the tobacco industry continues to thrive. The black market for more hardcore drugs like meth amphetamines and heroine is another good example of a market the products of which have often fatal results but continue unabated. They’re products directly, provably, harm people yet they don’t go out of business and in the case of tobacco don’t go to prison either. As the evidence mounts on the dangers of junk food sales have continued to rise, again because the health damages aren’t immediately apparent.

    If consumers acted perfectly rationally and with perfect information it’s likely that homeopathy and natural remedies would not be a thriving industry, however, although they have no provable benefit whatsoever they continue to grow and thrive. Their deregulation under the Dietary Supplement Health and Education Act has contributed to their increased sales even though the evidence for efficacy is either lacking or shows none.

    How can you see that all of this is true and still believe that classical free market principles are being acted out in these cases? Reality seems to imply a more complex set of interactions.

    Why exactly should a business, like the tobacco industry which has been shown to suppress evidence of the addictive properties of tobacco, receive anymore trust than politicians or government? The workings of the FDA are far more transparent than those of most companies, and this is precisely because its a government agency and not a private for-profit company. Should we trust it blindly? Of course not, but the FDA is one of the most scientifically scrutinized institutions in the world and so I put more trust in it than I do in market principles that I can clearly see don’t apply

    I agree that regulation is a trade-off between individual liberty and consumer safety and in most cases I don’t think that the trade-off is worth it because in most cases I think that the free market can regulate itself, but in the case of seriously harmful products where free market principles either don’t apply (due to addiction, slow health feedback, etc.) or waiting for them to apply means allowing serious harm to occur I think that a strong argument can be developed that justifies reducing our individual liberties for consumer safety and likewise in these situations I don’t believe that adhering to free market ideology simply for ideology sake can be justified. Your describing how the market should work, but it doesn’t take look at the markets for tobacco and junk food and see that that is not how it is working.

    Now do I personally think that those trade-offs are worth it? For hard drugs I’m not sure, I’d wanna see data for all the different forms of regulation from none to full criminalization to determine the cost/benefit of each. For tobacco and alcohol I find myself somewhat convinced by the Medicare cost argument, but am torn because of the regressive nature of those forms of taxes. For junk food, again I’d want to see much more data on it’s contribution to obesity, and health cost data due to any damages that can be causally linked.

    It’s at this point that I always become torn between the beautiful simplicity of individual libertarian philosophy and the hard facts of naturalism combined with an indescribable desire to fulfill my most compassionate urges. Trade-offs breed trade-offs but all freedoms protected represent only one half of all freedoms, the other half being equally limited.

  11. There’s always going to be people that aren’t aware that something is bad for them along with people that who don’t care (which is fine, it’s their choice). No one’s perfect and forcing them to do or not do something isn’t going to make them perfect, people are more complex than that.

    Smoking was at it’s peak in the 50’s and 60’s and has drastically gone down since then, even before drastic taxation was put into place. People eventually figured it out one way or another.

    And this is what makes me believe in people trading with each other, or capitalism, because there is always a positive trend in the long run. People live longer than ever before, are more educated that ever before and do more to help each other than ever before. Capitalism is a bottom up approach to self-regulation, instead of a top down approach that the government takes and I think because of the fact things are so complex, it works better that way.

  12. Josh Wittner Says:

    In the long run I have a lot of belief in the ability of capitalism to correct itself, but I see no reason that the government shouldn’t create clear incentives to encourage the market to react faster. Especially in cases like tobacco where a slow reacting market increases human suffering. To me government is just another tool and I see no reason to flatly call all government regulation erroneous or overstepping simply because it is not a part of the classical model of free market incentives. Keeping people healthy and alive is in the best interest of the government.

    So there are three situations I see now that I think we should evaluate, first is the tobacco tax, second is the out right ban of hard drugs and third is the out right ban of food stuff, in particular I’ll use artificial trans fats.

    So on the tobacco tax I think we can both come to an agreement. Lets take a very simple form of government, one that only has two functions: maintain a military and maintain a judicial system. A very libertarian style government. Lets even use some numbers (imaginary though they are): it takes 500 billion dollars to run this government. So if we have to raise 500 billion dollars that means we’re going to have to tax people. That means we have to pick how we tax people. There are many ways that tax revenue can be built. Now if this country has decided to have an income tax, there has been created a disincentive to increase ones income, if reasonable this disincentive isn’t strong enough to dissuade personal desire to increase ones income. Now if we introduce a tax on tobacco which will create a disincentive to buy tobacco products, which will save lives (there by lowering medical costs, increasing long term income tax revenue, and improving the general welfare) we can reduce the income tax rate and make the disincentive to increase ones income less.

    While we both will agree that the government spends too much money in inefficient ways, it does take money to run the government and that money must come from somewhere. A tobacco tax raises government revenue while creating much better incentives than a lot of other forms of taxation.

    Out right bans are very different than levying taxes on a product (as long as the taxes aren’t exorbitant). If the products being banned aren’t substitutable by other non-banned products then a black market is likely to form as long as the cost of executing in a black market doesn’t result in exorbitant prices. Also bans on end consumer products (hard drugs, etc.) also encourage black markets to form since consumers have no other recourse because they lack production capabilities. Criminalizing the product also comes with sever negative effects as we then put people in jail (which is costly) and produces more criminal behavior, etc.

    However, in some cases, and artificial trans fat is a great example, the product is easily substitutable (by similar priced fat products) and since the ban is not on an end consumer product it is likely to have little or no negative impacts. The only perceived negative outcome is that ones individual liberty to produce foods with trans fats has been reduced. In my opinion not a governmental overstep.

    I gotta jet so I haven’t reread this so don’t be too harsh if there’s bad grammar and shit.

  13. I’m not against government intervention only because I believe in the free market. I’m also against it because it creates new problems (like the one you outlined about prohibition leading to violence). Another one being Medicare which has created the problem we are talking about, having to tax people for unhealthy habits, in order to pay for it!

    I suppose taxation isn’t as bad as banning something, but it’s still immoral to me to do it because some people think others don’t know how to take care of themselves.

    And taxing something just because the government ‘needs’ it is really not a good reason to do it since government officials will always claim to ‘need’ it which is why it continues to grow. I think there would be more than enough funds for the government (limited to police, military, and judicial) if it was done as voluntary donations. I would surely donate.

  14. Josh Wittner Says:

    I understand that you fundamentally disapprove of government regulation and government services, but it is my view that while that might mean you disagree with taxes on tobacco in general, due to the state of the country and the governmental services on hand, taxing tobacco –argued from the stance of the heavier burden tobacco users present to the system in place– would increase the fairness of the system already in place.

    Why sacrifice that small improvement in a system just because you wish the system was significantly different or didn’t exist at all?

    I agree that taxing just to control people is a bad idea, and no one is arguing that that is what we should do.

    In this case, due to the recession, the tobacco tax is on the table (along with many many cuts) as a means to make up what will be continuing losses in property taxes (due to depreciation) and the state sales tax (due to less consumption). It isn’t just a tax increase for more revenue. Not a rebuttal to your point, but I’m trying to stay somewhat specific here where you’re arguing against a specific topic from broad angles.

    The problems with a donation based system are many, but I’ll hit a couple of the most glaring (also the first ones I thought of). First it puts direct and obvious incentives on the police, military and judicial system to behave in ways that increase or maintain donations which due to our countries ever-widening income gap will mean that very often those incentives won’t align with general-welfare goals. Taxes create a divide between government income and government goals. The political system can still be rigged to steer government goals, but services with defined purposes can be more free from direct exploits. I’m much more comfortable with a tax funded city police than the Bill Gates police force.

    Secondly, a donation based revenue plan would put a lot of instability into the system. What happens to the police, military, and judicial system if revenues fall drastically for a year? Can they borrow against the deficit? If so, what immediate incentive do people have to donate as they will still see the system functioning with decreased donations? If not, what happens to the employees of these systems? What happens to the jailed criminals if we can’t pay to house them?

    Thirdly, it seems reasonable to me that in the donation based system the amount spent on the government by all but the most rich will continue to decrease (which leads to my first point) since the rich have so much more to lose and thus much more to gain from maintaining the police, military and judicial systems than the middle class or poor do. Taxes ensures that while the cost cannot be equally born by all citizens, all citizens (except for the most poor) invest in services everyone can agree we need.

    My point is that a donation based system has a lot of immediate and systemic ramifications and I suspect that economists and political scientists could come up with some really complicated ones. I’m interested in this.

    I think that there are services that a government should guarantee and I think that just some of those are police, military, and judicial. But I disagree that a donation-based no-tax system is any better or more fair than a tax system. It’s certainly not clear that it results in a better or more fair nation. Do you know of any economic or political science papers exploring this idea? Are there any governments today that run this way?

    If a donation based system could be proven to overcome these hurdles, even if its just in models (provided they’re accurate enough) I’d be inclined to support the idea. Even if that were true though, I would still not oppose a tobacco tax on the grounds that taxes are bad (they may be the least worst option). We can try and improve the system we have, while arguing that it should be different.

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