Phil Kerpen, Director of Policy at Americans for Prosperity, penned an op-ed in today's Washington Times on a potential reauthorization of the State Children's Health Insurance Program (SCHIP) being funded by a 156% increase in the federal cigarette tax, from 39 cents to $1 per pack. Kerpen cites our studies on cigarette taxes to argue that while President-Elect Barack Obama and the Democrats swept into power by promising not to raise taxes on anybody making less than $200,000, this tax increase would hit the poorest Americans hard.
This tax hike would wallop the poor. An analysis by the Tax Foundation found that cigarette taxes hit the poor harder than any other federal tax, hitting the bottom 20 percent, 37 times harder than raising the same amount of revenue from the income tax, because while the income tax falls mostly on people with higher incomes the cigarette tax falls heavily on less affluent Americans.
This dramatic expansion of SCHIP is a bad idea, regardless of how it's funded. It would be a big step toward universal government children's coverage which could, in combination with other program expansions, lead to a universal government-run health insurance system. Such a system would be rife with long waiting lines and substandard quality of care -- judging by international experience. Indeed this comes at a time when the rest of the world is moving away from government health insurance. This is made even more egregious when funded by a cigarette tax hike that forces the poor to pay for expanding this entitlement into the middle class.
Using Tax Foundation data on state cigarette taxes, the Cincinnati Enquirer reported today that Kentucky Governor Steve Beshear is proposing a 70 cent cigarette tax increase, putting it at $1.
You can learn more about our analysis of cigarette taxes here.
LA Times Editorial Takes on ATR's Tax Pledge
In yesterday's Los Angeles Times, the editorial board rails against Grover Norquist and his famous "pledge" that elected officials often take, promising not to raise taxes.
Republican members of the Assembly and state Senate signed pledges to oppose any tax increase, and so far they have not moved from that position. One result is that California has a budget billions of dollars out of balance. Schools must cut education programs, physicians who treat patients eligible for Medi-Cal are going unpaid, many bond-funded construction projects have been halted and the state's credit rating is in jeopardy.
GOP lawmakers don't bear the sole blame for these catastrophes, because higher taxes are not and should never be deemed the automatic government response to an economic downturn. In fact, Republican lawmakers are correct when they argue that higher taxes can slow recovery at just the time the state needs to juice the economic machinery. But that argument frames what ought to be Republicans' main point: not that taxes must be avoided at all costs but that Sacramento must protect Californians and get the economy moving.
The no-tax pledge, or, more formally, the Taxpayer Protection Pledge -- originated and monitored by Republican lobbyist Grover Norquist's Americans for Tax Reform -- blindly promotes one policy position over the interests of the economy and even taxpayers. It's the wrong pledge.
It is true that ATR's pledge blindly promotes one policy position; but in ATR's opinion, such a never-changing view is in the interest of the economy and taxpayers.
Such a blind view that it's never beneficial to raise taxes is not an optimal first-best policy, however, despite what anti-tax advocates may say. If we had politicians who were truly concerned with the well-being of society in general, then such a pledge would actually never be productive. But that of course is not true as politicians aren't always seeking to pursue the public interest. So the question becomes: Is a "no new taxes" rule a second-best alternative? (TABOR-style provisions face the same question.)
In many cases, the pledge likely improves societal well-being. But in some cases, it's possible that it decreases societal well-being. Given how much California spends on government, I'm dubious of the claim that its government (on whole) is too small. (There are some things in California government that the state is spending too much on and there are some on which it is spending too little, but on net, they're probably spending too much.)
But that brings us to the question, What are the downsides to "the pledge" even if you believe that politicians systematically favor an excess of government? First, while it may not sound sexy, a "no new spending" pledge would be more appropriate because, as Milton Friedman once said, "to spend is to tax." Due to the fact that politicians are concerned mostly with the short term, a "no new taxes" pledge as opposed to a "no new spending" pledge can encourage deficit financing and do little to control spending and thereby the long-run tax burden. (This is an empirical question of the degree to which 'starve the beast' actually works.) But one other problem with limiting politicians' choices (even through a spending control provision) is that they may make matters even worse. A politician who is seeking to institute some policy can do so through tax policy, spending policy, or regulatory policy. For example, a pledge may stop a politician from redistributing income through a tax-and-spend welfare program, but it may lead the politician to try to redistribute income via barriers to trade or, say, an increase in the minimum wage, which could have even worse consequences for societal well-being.
State Budgets: Alaska Modestly Cuts Spending; Budget Assumes Oil Price Rebound
Alaska Gov. Sarah Palin (R) has proposed a 7 percent spending cut in the $11.2 billion budget to close a $402 million shortfall (the comparison does not count $746 million in checks mailed out last year from windfall profits tax proceeds). Alaska's general fund derives much of its revenue from oil revenue and taxes, and the budget assumes the price of oil in 2009 will be $64 and the following year $74.41. (The current price of oil is about $45.)
More on Alaska here.
WhatÂ’s Wrong with CaliforniaÂ’s Sales Tax Exemption for Groceries?
New regulations from the California State Board of Equalization (BOE) are supposed to clarify how grocers should tally their tax-exempt sales. Instead they inadvertently make a good argument for abolishing the tax exemption entirely.
Grocery tax exemptions have been sweeping the country on the flimsy argument that state sales taxes applied to groceries are unfair to the poor. In fact, the poor's groceries, when purchased with food stamps, are better than tax-exempt - they're free. If the legislature feels that food stamps are not reaching enough of California's poor, or that the stamps aren't worth enough to buy sufficient groceries, then California should expand its food stamp program and apply its general sales tax to all other grocery purchases.
Will there be some people just above the food stamp threshold for whom the tax will sting? Yes, but that demographic can be (and already is) targeted for tax relief through the income tax.
The damage done by the grocery exemption is considerable. It makes sales tax revenue much less stable, a major problem in California. It also forces up the tax rate on every other purchase: California's minimum sales tax rate of 7.25% is highest in the nation. And as for the complex business of how grocers must sort out what's taxable and what's not, the BOE regulations speak for themselves:
1. "Exempt food products" means those items generally described as food products in Section 6359 and Regulation 1602. If grocers are uncertain as to the classification of any product, they should contact the nearest board office.
Gee, that's not too helpful. If the BOE is so unclear about what's exempt, maybe they do better describing what must be taxed:
Grocers selling clothes, furniture, hardware, farm implements, distilled spirits, drug sundries, cosmetics, body deodorants, sporting goods, auto parts, cameras, electrical supplies, appliances, books, pottery, dishes, film, flower and garden seeds, nursery stock, fertilizers, flowers, fuel and lubricants, glassware, stationery supplies, pet supplies (other than pet food), school supplies, silverware, sunglasses, toys and other similar property should not include the purchases and sales of such items in the purchase-ratio method.
Actually, that's not too helpful either. Of the thousands of items not listed, which of them would be "similar to" farm implements, deodorant or sunglasses?
The complex BOE regulations go on and on, giving grocers advice on how to tally coupons, handling allowances, snack bars, gasoline sales, etc., etc. They describe the purchase-ratio method of calculating tax-exempt sales, the modified purchase-ratio method, the retail inventory method, and finally the mark-up method which includes this gem of a requirement:
Determine markup factor percentages by commodity groupings based on shelf tests covering a minimum purchasing cycle of one month within a three-year period.
But those aren't all the methods grocers can use!
List of Methods Not Exhaustive. The methods by which grocers may determine their sales of exempt food products are not limited to the methods described above.
How about this for an alternative method: All sales by grocers subject to sales tax unless purchased with food stamps. The tax rate could be lower, the revenue more stable, and the regulations much shorter.
State Budgets: Arkansas Forecasts Surpluses
Arkansas Gov. Mike Beebe (R) has introduced a balanced $4.4 billion budget, including $145 million in unfunded spending, and a $30 million cut in the sales tax on groceries from 3 percent to 2 percent (the general sales tax is 6 percent). The budget also proposes adding $120 million to the state's rainy day fund over the next two years.
More on Arkansas here.
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