July 25, 2007

And I mean big time. I refer to the proposal for a sharp increase in the federal tobacco tax---from 39 cents to $1 per pack---as a revenue source for the $35 billion increase in SCHIP funding over the next five years.

Let's take a deep breath here, shall we? Have the geniuses on Capitol Hill ever heard of the internet? Of Indian tribal lands? Of the Mexican and Canadian borders? Ad infinitum: The means by which such increased taxes can be evaded are limited only by the human imagination, which is to say, not at all. As the tobacco tax rises, the gap between total and taxed sales of cigarettes will grow, meaning that even the existing lower tax will not be collected on illicit sales. And that is why it is wholly plausible, even if not probable, that the proposed increase in the tobacco tax might actually lose revenue. What is implausible is the notion that the tax will raise the revenues claimed over time, because time will allow the market to find more and more ways to evade the tax.

The experience at the state and local levels with respect to sharp increases in tobacco taxes is not encouraging; the net revenue increases never materialized in the amounts claimed. The feds have more monopoly power than states and localities---cigarettes trucked from North Carolina to New York cannot avoid the federal tax---but it remains the case that the all-knowing, all-seeing federal government cannot keep narcotics out of the country, or, for that matter, poor workers. Indeed, we cannot keep narcotics out of prisons. Can the bureaucracy keep cigarettes out of the country? Please.

But it will try. And so, like the proverbial bull in a china shop, it will step on toes and destroy businesses and shatter glass in a futile effort to do so. Thus will a legislated increase in the size of government lead inexorably to more power grabs as a means of preventing the erosion of yet another federal claim on private-sector resources. And it will do so in the name of SCHIP for the children. This is what passes in the Beltway as "compassion."

Posted by Benjamin Zycher at July 25, 2007 11:54 PM

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