Tag Archives: Vermont

Are High Taxes on Smokeless Tobacco Encouraging People to Smoke?

President Obama’s recent budget proposal to pay for pre-school programs by increasing cigarette taxes highlights the confusion both on federal and state levels over taxing tobacco products. A recent Mercatus working paper questions the efficiency and utility of sin taxes in general. But even more fundamentally, tobacco tax policy may fail in its primary goal, which is to reduce the health risks of consuming tobacco.

Since the goal of tobacco taxes is to reduce tobacco’s harms by discouraging its use, the tax rates on various tobacco products should be commensurate with their health risks. If smoking carries four times higher cancer risks than using smokeless tobacco, then the tax rates on cigarettes should be four times higher than taxes on, for example, smokeless tobacco. Yet if cigarettes are taxed at a lower rate than this ratio, the policy may in fact encourage tobacco users to smoke as opposed to using less harmful smokeless tobacco.

A health policy that does not encourage riskier tobacco products should set the ratio of smokeless tobacco and cigarette taxes similar to their health risk ratios. According to a recent review of medical studies, snus (a common type of smokeless tobacco) users face considerably lower oral cancer, gastric cancer and cardiovascular disease risks compared to smokers (see Table 1). In addition, other studies found that, unlike smoking, snus does not lead to lung cancer (the table shows the lung cancer risk for nonsmokers compared to smokers). Importantly, snus users do not expose those around them to second hand smoking, further limiting its negative health impacts. Based on the relative health risks, snus taxes should be considerably lower than cigarette taxes.

Table 1. Comparative Health Risks

Health Risk Risk Ratio (Snus users vs. Smokers)
Oral Cancer 0.43
Gastric Cancer 0.60
Cardiovascular Diseases 0.55
Lung Cancer 0.14

So how do states fare? Table 2 shows the tax rates for cigarettes and smokeless tobacco for select states, which are calculated based on the data are from Tobacco Free Kids campaign (in the source, the tax rates are per ounce of snus and per pack of cigarettes). To make sure that we compare apples to apples, I account for the varying nicotine content in these products. According to a recent study, consuming one gram of snus delivers nicotine content equal to smoking a cigarette. That works out to about a can of snus (typically 1.2 oz) replacing approximately 35 cigarettes (almost two packs). So I convert state taxes to show rates per equivalent nicotine amounts. For simplicity, I focus only on the states that tax smokeless tobacco by ounce. Other states tax smokeless tobacco based on either wholesale or manufacturing prices rather than retail, making calculations trickier.

The relative cancer and cardiovascular disease risks of snus are lower than the risks of smoking, ranging between 0.14 and 0.6 (see Table 1). States with a high snus to cigarette tax ratio are essentially pushing tobacco users towards smoking, which carries higher health risks (coded red in the table). States with a moderate tax ratio are somewhat neutral (coded yellow). Their tax ratio is commensurate with relative health risks for some but not all risk sources. Finally, states with a low tax ratio generally encourage tobacco consumers to use a safer product (coded green).

Table 2. State Tobacco Taxes for Equivalent Nicotine Content

State Snus Tax (gram) Cigarette Tax (cigarette) Tax Ratio (Snus/Cigarette)
Arizona $0.01 $0.10 7.88%
Connecticut $0.04 $0.17 20.75%
Delaware $0.02 $0.08 23.81%
District of Columbia $0.03 $0.13 21.16%
Illinois $0.01 $0.10 10.69%
Iowa $0.04 $0.07 61.73%
Maine $0.07 $0.10 71.25%
Montana $0.03 $0.09 35.27%
Nebraska $0.02 $0.03 48.50%
New Jersey $0.03 $0.14 19.60%
New York $0.07 $0.22 32.44%
North Dakota $0.02 $0.02 96.20%
Oregon $0.06 $0.06 106.42%
Rhode Island $0.04 $0.17 20.39%
Texas $0.04 $0.07 59.54%
Vermont $0.07 $0.13 50.35%
Washington $0.09 $0.15 58.91%
Wyoming $0.02 $0.03 70.55%

Note: snus and cigarette taxes are rounded to nearest cent. The tax ratio is based on actual tax values.

The picture that emerges from the table is that of a confused health policy pursued by the states. Only two states in the list set the snus and cigarette tax rates at the level that does not steer consumer towards riskier tobacco products. Most states set the tax rates at levels that are commensurate with some risks but not the others. Specifically, most states do not account for the fact that snus does not cause lung cancer, which is one of the greatest risks of smoking. Finally, a few states may be steering tobacco users towards cigarettes by setting snus taxes too high (or cigarette taxes too low).

I am not claiming that smokeless tobacco is harmless or that states should promote smokeless tobacco as a substitute for cigarettes. As the National Cancer Institute points out, smokeless tobacco is not a safe alternative to smoking. It still carries increased health risks, including certain types of cancer and cardiovascular diseases. But current policy on tobacco taxes may result in the unintended consequence of pushing tobacco users away from less risky forms of tobacco towards riskier ones.

New Edition of Rich States, Poor States out this Week

The fifth edition of Rich States, Poor States  from the American Legislative Exchange Council is now available. Utah took the top spot in the ranking of states’ economic competitiveness, as it has every year the study has been produced. Utah excels in the ranking system because it is a right-to-work state, it has a flat personal income tax, and no estate tax, among other factors considered in the study.

The other states that round out the top ten for Economic Outlook include South Dakota, Virginia, Wyoming, North Dakota, Idaho, Missouri, Colorado, Arizona, and Georgia. On the bottom end of the ranking, the states with the worst Economic Outlook are Hawaii, Maine, Illinois, Vermont, and New York at number 50 for the fourth year in a row.

Several measures of economic competitiveness offer supporting evidence that these states have some of the worst policies for business including Mercatus’ Freedom in the 50 States and the Tax Foundation’s State Business Tax Climate Index.

The authors of Rich States, Poor States, Arthur Laffer, Stephen Moore, and Jonathan Williams demonstrate Tiebout Competition in action. They find a strong correlation between the states that have high Economic Outlook rankings with the states that are experiencing the highest population growth through domestic migration. Likewise, the states that experienced the largest losses due to out-migration include Ohio and New York, ranking 37th and 50th respectively.

The study draws attention to the role that unfunded pension liabilities play for states’ future competitiveness, as this debt will require difficult and unpopular policy decisions as current tax dollars have to be used to fund past promises. Laffer, Moore, and Williams draw a comparison between Wisconsin’s recent reforms that put it on a more sustainable path compared to its neighbor Illinois:

In stark contrast to Wisconsin’s successes, the story in Illinois is not so uplifting. Over the last 10 years, Illinois legislators have continuously ignored the pension burden in their state—so much so that Illinois has one of the worst pension systems in the nation, with an estimated unfunded liability ranging from $54 billion to $192 billion, depending on your actuarial assumptions. Furthermore, the official state estimates do not include the $17.8 billion in pension obligation bond payments that are owed. In addition, Illinois policymakers have spent beyond their means, borrowed money they don’t have, and made promises to public employee unions that they cannot fulfill. Not only did Illinois face significant unfunded pension liabilities, but also lawmakers had to confront large deficits and potential cuts to state programs.

While the policies that improve state economic competitiveness are clear, the path to achieving them is difficult after voters grow accustomed to programs that their states cannot afford. However the bitter medicine of reform is worthwhile, as we know that economic freedom is not only better for business, but evidence shows it also improves individuals’ well-being.

Balanced Budget Rules and Unintended Consequences

In my view this is one reason of many why a balanced budget amendment is not a workable path toward fiscal conservatism.

That is Tyler Cowen’s take on my paper with Noel Johnson and Steven Yamarik. I can certainly see why he might come to this conclusion.  We find that when Democratically-controlled states face a binding constraint on their ability to carry a deficit over from one year to the next, they may regulate more instead. A friend of mine calls this the “muffin-top” problem: belt-tightening can sometimes lead to unsightly bulging…elsewhere.  In spite of the muffin-top problem, I am actually still an advocate of a balanced budget amendment at the federal level.

Though I often marvel at the fiscal irresponsibility of state governments, I can’t help but feel that if the states and the federal government were in some sort of fiscal beauty contest, the states would easily come in 1st through 50th while the federal government would come in 51st.  Consider:

  • Collectively, state and local governments are in debt to the tune of about 2.6 trillion dollars, while the federal government has racked up nearly 4 times that amount.
  • The states have accumulated $9.9 trillion in unfunded obligations that will come due over the next several decades.  The Feds, meanwhile have accumulated 5 to 10 times this amount (depending on whether you agree with Medicare’s chief actuary that the current political path is highly unlikely).
  • Most states manage to balance their operating expenses (some gimmickry aside) on an annual or biannual basis. In contrast,
    for the last 80 years, the federal government’s norm has been to run an annual operating deficit (with deficits about 85 percent of the time).
  • When states do borrow, it is typically for long-term capital projects (again, some gimmickry aside).  So future generations are on the hook for bridges and buildings that they, too, will use. In contrast, the Feds don’t even pretend to borrow for future projects; much of what my daughter’s generation will pay for is my generation’s consumption.
  • When states encounter budgetary problems, they tend to deal with them by cutting spending rather than raising taxes.

All of this is somewhat surprising given the fact that, constitutionally, the states were given a blank check whereas the feds were not. As Madison put it in Federalist 45:

The powers delegated by the proposed Constitution to the federal government, are few and defined. Those which are to remain in the State governments are numerous and indefinite.

So why, given so much more (constitutional) power than the feds, do the states seem to manage their affairs more-responsibly? Tiebout competition and the lack of a central bank likely play a role. But I believe the fact that every state but Vermont has to balance its books each year must account for a large share of this relative fiscal probity.  As James Buchanan and Richard Wagner argued over 30 years ago, the ability to buy items for today’s generation while putting the tab on tomorrow’s generation creates a systematic bias in favor of irresponsible spending. In contrast, they argue:

The restoration of the balanced-budget rule will serve only to allow for a somewhat more conscious and careful weighting of benefits and costs. The rule will have the effect of bringing the real costs of public outlays to the awareness of decision makers; it will tend to dispel the illusory “something for nothing” aspects of fiscal choice.

I believe the evidence supports this claim.  David Primo (2003) and Mark Crain (2003) find that states with a strict balanced budget requirement tend to spend less than other states.  Shanna Rose (2006) finds that states with strict balanced budget requirements tend not to experience a political business cycle in which government spending rises just prior to an election and falls shortly thereafter. Bohn and Inman (1996) find that states with strict balanced budget requirements tend to have larger General Fund surpluses and larger rainy day funds.

In our paper we find that stricter balanced budget rules tend to constrain partisan fiscal outcomes.  The fact that they may lead to bulges in the regulatory state is, indeed, unfortunate.  But in my view, that suggests that we should also examine biases in the political economy of regulation and consider institutional reform to address those as well.  Perhaps there is need for a more-conscious weighing of the benefits and costs of regulation?  If belt-tightening leads to muffin-tops, maybe we need more than a balanced budget amendment?  Perhaps spanxs?

What Caused the State Budget Gaps?

I know the conventional answer: the recession. And surely there is validity to the conventional answer. The recession was the proximate cause: it sent revenues in a free fall at the same time that it put extra demands on the states’ welfare systems.

But the budget gaps were pretty different from state to state. For example, California faced a 2010 budget gap that was 65 percent of its General Fund while North Dakota faced no budget gap at all. Might differences in state policy and differences in state institutions explain the vast difference in gap size? This was the motivation for my recent working paper, State Budget Gaps and State Budget Growth.

In it, I conclude that large gaps were the result of rapid growth in per capita spending, a lack of economic freedom, and weak balanced budget rules.

To arrive at this conclusion, I performed a series of statistical tests, focusing on the size of state budget gaps, measured as a share of state general funds. In these tests, I controlled for various factors that might influence the size of a state’s gap (its population, income level, demographic makeup, etc.). After controlling for these factors, I was able to estimate the impact of certain policy choices and institutions on the size of states’ budget gaps. In particular, I focused on:

  • Budget size relative to state income,
  • Growth in per capita spending in the two decades preceding the recession,
  • Levels of economic freedom, and
  • Stringency of state balanced budget requirements.

I found that states that spent a large share of state income—and have done so for many decades—had smaller (percentage) deficits. This may be because states grow accustomed to making their budgets balance or it may be because the same factors that permit steady revenue streams also permit large budgets. But this doesn’t mean policymakers should go on spending sprees and expect smaller budget gaps. In fact, a spending spree is likely to make a state’s budget gap worse. Other factors being equal, states whose per capita spending increased the most in the two decades preceding the recession had budget gaps that were nearly 20 percentage points larger than states whose per capita spending increased the least. Since the median state’s budget gap was 23 percent of its general fund, going from the slowest to the fastest-growing state can make a huge difference.

Economic freedom (characterized by low taxes and minimal regulation) makes an even greater difference. Using Jason Sorens and William Ruger’s measure of economic freedom, I found that other factors being equal, the most-economically free states tended to have budget gaps that were 25 percentage points smaller than the least-free states.

Lastly, states with weak balanced budget requirements had larger budget gaps. While every state but Vermont is required to balance its budget, some requirements are weaker than others. It turns out that those states with weak balanced budget requirements encountered larger deficits to begin with: theirs were 8 to 10 percentage points larger than those with strong balanced budget requirements.

So what caused the budget gaps? Policy makers may be all-too-happy to pin the blame on the recession. But my research suggests that policy choices in the decades preceding the recession made a big difference. Rapid growth in per capita spending, a lack of economic freedom, and weak balanced budget rules caused the gaps. The recession just exposed these underlying problems.

Legal Plunder

How does law enforcement finance operations? Increasingly, police departments across the country pay for their activities, equipment and supplies by seizing the assets of people who have never committed a crime. It’s a process called civil forfeiture, and it’s at best, controversial. At worst, it provides direct monetary incentive for states and the federal government to steal property from innocent citizens. Gives a whole new meaning to Bastiat’s “legal plunder.”

Radley Balko explains how civil forfeiture perverts the “protect and serve” motto by introducing a profit motive: Continue reading

Burlington, Vermont Downgraded

Burlington, Vermont’s bond rating has been downgraded from Aa3 to A2 and placed on negative credit watch by Moody’s due to a high debt level. At Digital Society, George Ou places the blame on Burlington’s municipal fiber telecom:

In a city with approximately 20,000 homes and businesses, 4800 of which are municipal fiber subscribers, Burlington Telecom seems to have racked up a $50,000,000 debt.  That works out to about $10,417 per subscriber which is a huge tax payer subsidy for relatively affluent homes and businesses that can afford the relatively expensive fiber service.  Three out of four Burlington residents don’t subscribe to the municipal fiber service and it is likely that many of them can’t afford the service yet all of them are subsidizing the muni-fiber service with regressive local sales taxes.

Worst still, Burlington Telecom’s deficits and debt are rising which makes the prospect of financial stability more of a dream than reality.  This is likely due to the low 24% adoption rate and a dearth of premium high paying customers which makes it extremely difficult to recover the high costs of building out 100% of the residents and businesses.  There is even a criminal investigation to determine if millions of dollars have been misappropriated and a lawsuit to reclaim $17 million that Burlington Telecom took in 2008 from the treasury without notifying taxpayers.

Just last year, Burlington was crowing about its Aa3 bond rating and its fiscal prudence, predicting that Burlington Telecom would become self-sustaining in the near term. What a difference a year makes.

Via the Twitter feed of Cord Blomquist.