Saturday, September 09, 2006

Nullum prandium, non es gratuitum....Post #1 about the California Election

Every once in a while voters are asked to vote for something that promises something for nothing. In this election voters in the state have at least two like that. The first (Proposition 86) would raise taxes on cigarettes. In California, smokers pay 87¢ per pack to light up. That comes from 12¢ of cigarette taxes and 75¢ of surtax which came from an earlier proposition. Proposition 86 on this year's ballot would increase the tax so that a pack of smokes would increase to about $7 to fund hospitals and other medically related things. California's current rate is about in the middle of the pack (no pun intended)- with Rhode Island at more than $2.40 and Missouri at a mere 17¢. In some states, with state and local add ons the taxes can come to as high as $3.50 per pack. Our neighboring states are close to where we are, so unlike the New York tax where people can go across state lines and get cheaper smokes. The possibility of interstate purchase to save the tax is relatively limited (that is called tax shifting). Some of the opponents have argued that this will induce smuggling and even one has invoked the specter of terrorists into the equation (that is nonsense).

We all feel morally superior when we stick it to smokers. But right now even with a middling tax we are second in the country in the lowest percentage of smokers with only about 14% of adults and 13% of youth smoking. That did not come about because of the original increase in the tax but rather because of other lifestyle changes in California that have happened over the last couple of decades. California's rate compares to a number of higher states where the smoking rate is close to 25%. (The national rate is about 20%.) But there are two ironies here. First, supporters want to impose a tax expecting it to fund something that is very necessary in the state but also understanding that as you raise taxes the number of taxpayers (those who continue to buy the taxed product) continues to decline. The research there is pretty clear. Second, the tax also has some other features that may well be undesirable. For example, the proposition exempts hospitals from anti-trust law. What does that have to do with cigarette taxes? Well, nothing. But remember the original cigarette tax of 75¢ had a bevy of special goodies for those who wrote the proposition. It also sets tax rates that are very hard to change - so the already complicated budget situation is exacerbated.

A second measure like the cigarette tax is Proposition 87 – the Alternative Energy. Research, Production Incentives. Tax on California Oil. What better thing than to again feel morally superior and stick it to big oil? That measure would impose a 6 percent tax on producers of oil extracted in California, to pay for research and production incentives for alternative energy vehicles and clean-burning fuels. But again, after the chance to feel morally superior and stick it to big oil, the extraction tax would set up a new bureaucracy to do all this "research" and would appoint a bunch of new folks to administer the dough. This could be as good as the Reiner Commission that the voters adopted to fund programs for kids - except according to estimates this one would produce more dough for the appointees to dither with and even less control in the budget process.

There are a lot of interesting issues on the ballot this fall. I will give you my analysis on most of them before Novmber - but in both 86 and 87 the line about a free lunch should not be underestimated. We may feel better about stopping people from smoking and reigning in big oil but when you look at the lousy policy that each would create, there is no good reason to pass either.

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