PRESIDENT Barack Obama and other liberals believe tax increases won't change citizens' behavior and harm the national economy. Consumer response to cigarette taxes proves them wrong.
Oklahoma's cigarette tax was increased by 80 cents to $1.03 per pack in 2004, but compacts allowed nearly one in five tribal smoke shops to collect only 6 cents per pack in tax. This translated into a price advantage of as much as $10 per carton over nontribal retailers and led to a massive shift in buying habits. Although there were fewer than 200 tribal smoke shops and roughly 4,500 nontribal outlets selling tobacco, American Indian smoke shops soon accounted for nearly 50 percent of cigarette sales in Oklahoma (and as much as 70 percent of the Tulsa market). By 2006, it was estimated Oklahoma government was losing roughly $48 million per year in tobacco tax collections because of the shift.
Such glaring price/tax differences also create a black market for tobacco products, as was highlighted again last week when federal officials seized more than $266,000 from the bank account of a tobacco company owned by the Seneca-Cayuga Tribe of Oklahoma and detained a tobacco wholesaler in New York. The multi-state investigation centers on alleged trafficking of Oklahoma cigarettes to New York, where the cigarette tax is $4.35 per pack.
Obviously, there's a difference between choosing to legally buy lower-tax cigarettes at a specific outlet and operating a black market. Still, the message is clear: Tax rates impact behavior. That's something President Obama and Washington liberals don't seem to understand.
Unless the president and Congress act soon, we are now less than 100 days from what some are calling “Taxmageddon,” the date that the Bush-era tax cuts expire. If this occurs as scheduled, Americans at all income levels will take a hit. The income tax rate will jump from 35 to 39.6 percent for top earners (which includes countless small-business owners) while those in the lowest income bracket will have their tax rate increased by 50 percent.
The marriage penalty will be reinstated, the child tax credit will be cut in half, the death tax rate will be as high as 55 percent, the capital gains tax rate will rise from 15 percent to 23.8 percent, and the top dividends tax rate will rise from 15 percent to 43.4 percent. In addition, the Obamacare Medicare payroll tax increase takes effect Jan. 1, climbing from 2.9 percent to 3.8 percent for those with income exceeding $200,000 (or $250,000 for married couples).
The combined impact of all taxes scheduled in January is nearly $500 billion. The Congressional Budget Office predicts a recession will occur as a result.
Obama and congressional Democrats claim they want to prevent tax increases for lower-income families and only want to “tax the rich.” That would make a bad situation only slightly less dire. Hiking taxes on upper incomes, capital gains and dividends will hammer job creators. The perverse incentives of Obama's tax policy will cause many entrepreneurs to limit their exposure. The end result will be fewer jobs and less opportunity for all.
To avoid paying a few bucks extra for cigarettes, smokers will substantially alter their behavior. What does the president think rational business owners will do when facing billions in new taxes?