Saturday, 22 August 2009
Why Raising Taxes On Cigarettes Will Fail To Generate New Revenue
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For some reason Democrats believe that if you raise a tax on a product new revenue will come flowing into the government coffers. Rarely does it work as planned. Why? Because when you raise taxes on a good, it becomes more expensive for the consumer. The new higher cost forces people to cut back on their usage of the good, find a work around, or forgo it all together. Take the latest tax on cigarettes. The government is hoping to reap a windfall from the tax. The only problem is that it is becoming too expensive for smokers to purchase cigarettes. So many are quitting or cutting back. Apparently, smokers are finding cheaper alternatives.
For our example let's keep it simple. We are going to have 100 smokers who are paying $1 in tax for cigarettes. The government is now collecting $100 in taxes from these smokers. The government decides to raise taxes 30%. The new tax is now $1.30 on cigarettes. Those in government believe they will now get $130 in taxes from these 100 smokers. A nice increase in revenue.
The only problem is many of the smokers can't afford the new tax. Let's assume 20 decide it is to expensive and quit smoking while 5 decide to grow their own tobacco. Our pool of smokers paying the tax has now dropped to 75 people. The government will collect $97.50 in taxes from those 75 smokers.
Wow! The government is actually taking in less money than before they raised taxes. With the growing movement to reduce smoking and now the growing of your own tobacco, I imagine Kentucky will not see anywhere near the expected revenue they hoped when they raised taxes last year. Why did we raise taxes again? Sigh.
Driven largely by ever-rising tobacco prices, he's among a growing number of smokers who have turned to their green thumbs to cultivate tobacco plants to blend their own cigarettes, cigars and chew. Byars normally pays $5 for a five-pack of cigars and $3 for a tin of snuff; the seed cost him $9...Yep it is much cheaper just to grow your own tobacco. Why the latest growth in home made tobacoo? You can probably guess. Higher taxes.
In urban lots and on rural acres, smokers and smokeless tobacco users are planting Virginia Gold, Goose Creek Red, Yellow Twist Bud and dozens of other tobacco varieties.
"Cigarette smokers say, 'Yeah, we're going to die of cancer, but do we have to die of poverty as well?'" said Jack Basharan, who operates The Tobacco Seed Co. Ltd. in Essex, England. Virtually all of his increased tobacco seed sales have been in the U.S., he said.It is amazing how inventive people can be when faced with stifling taxation. What this means it that more people are finding ways to purchase less cigarettes. Which means less tax will be generated from the sales of tobacco. Let's look at some numbers to verify this process.
For our example let's keep it simple. We are going to have 100 smokers who are paying $1 in tax for cigarettes. The government is now collecting $100 in taxes from these smokers. The government decides to raise taxes 30%. The new tax is now $1.30 on cigarettes. Those in government believe they will now get $130 in taxes from these 100 smokers. A nice increase in revenue.
The only problem is many of the smokers can't afford the new tax. Let's assume 20 decide it is to expensive and quit smoking while 5 decide to grow their own tobacco. Our pool of smokers paying the tax has now dropped to 75 people. The government will collect $97.50 in taxes from those 75 smokers.
Wow! The government is actually taking in less money than before they raised taxes. With the growing movement to reduce smoking and now the growing of your own tobacco, I imagine Kentucky will not see anywhere near the expected revenue they hoped when they raised taxes last year. Why did we raise taxes again? Sigh.
Posted by at 9:23 AM in Kentucky Politics
