When the federal government raised the tax on the loose tobacco people use to roll their own cigarettes a staggering 2,000 percent, companies stopped selling “loose tobacco.” Smokers stopped buying it. Very little of the projected tax revenue of $35 million per month appeared.
Yet smokers still roll their own cheap cigarettes and still legally buy the ingredients.
Pipe tobacco is taxed at a rate of $2.83 per pound. Loose cigarette tobacco is now taxed at $24.78 per pound. Although pipe tobacco is, in general, cut rougher and sold moister than that used for cigarettes, there is no legal distinction between the products. They are taxed based on what their labels call them.
In just a few months, the production of tobacco labeled for pipes rocketed from 270,000 pounds per month to 1.7 million pounds per month. The production of tobacco labeled for cheap cigarettes plummeted from 1.5 million pounds per month to 660,000.
It shows what happens when taxes unfairly target specific behaviors and assault narrow groups. Savvy producers and consumers have switched to unusually dry, unusually fine “pipe tobacco” for rolling their smokes.
There is no justification for hiking the tax rate of any legal product 2,000 percent. It places an undue burden on consumers of a legal product, and in this case, it placed an undue burden on the group of mostly small businesses that produce loose tobacco.
The tax increase, enacted alongside hikes in the federal levy on cigarettes and cigars, is pointlessly discriminatory. Why should people who place their tobacco in cigarettes be charged 10 times as much tax as people who place their tobacco in a pipe?
Again and again we see that taxes meant to change the behavior of the taxed backfire. They rarely raise the revenue their proponents promise, generally don’t cause people to act as predicted and often create unintended consequences.
The fairer a tax is, the harder it is to evade. An income tax, if the government stopped providing deductions targeted to manipulate behavior, would be fair and almost impossible to circumvent. A sales tax, if the government applied it to all items rather than excluding goods and services it wants you to buy, would be fair and almost impossible to evade. A property tax, if it simply reflected a set rate multiplied by the current value of property rather than varying based on behavior legislators want to encourage, would be fair and almost impossible to evade.
Seemingly incapable of learning, the federal government is now looking to set stricter legal distinctions between pipe and cigarette tobacco in an attempt to collect its money. Unmentioned is the issue of why the tax on one should be 10 times the tax on the other.
Perhaps government policymakers think pipes are cool and intellectual, and home-rolled cigarettes are just uncouth. If so, that’s a poor rationale for tax policy.
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