Friday, July 15, 2005
HH: Now, the last time I looked, Governor, your government was shut down.There are four points to be made here. First, "finding common ground" is hardly what I'd call offering a deal of breaking the tax pledge in return for some reforms that did not materialize. Is the governor really going to make his case that he had to compromise and decided taxing smokers is "the least offensive" revenue generator versus a new tax rate on high-income earners and business tax credits? It's the least offensive to the Chamber of Commerce, perhaps. But to the average voter who smokes, the position itself will seem offensive. Democrats are already lining up to bang the "regressive cigarette tax" drum.
TP: [laughs] Well, it's back on, Hugh. We had, I'm not proud to say the first government, the first partial government shutdown in Minnesota over a dispute with the Democrats over tax and spend issues with the Democrats. It was very ugly and slow but we finally found some common ground. But we had to it under kind of a crisis situation.
HH: How did it resolve? Did you raise taxes?
TP: Well, we raised what I call a "health impact fee" on cigarettes but some are calling a tax. But it's a voluntary activity if you smoke, and we're putting the money into a dedicated account to help pay for health costs in large part...
HH: You know, I actually have no problem with that. I don't care what the anti-tax hard core says, I believe in taxing the heck out of cigarettes because of externalities and [unintelligible]. It's good economics.
TP: Well, you know, I don't, I'm not a big fan of growing revenues through new mechanisms like this as I hope I've proven as governor but the bottom line was we had a historic government shutdown we had to find common ground and compared to the alternatives of the Democrats wanting to tax everything including income and business taxes and a variety of other things. This was the least offensive. And the good news is other states have done it and smoking has decreased dramatically, and so this has a health benefit as well.
HH: You know, most the time they want to tax breathing and not just smoking and so you've held the line there pretty well. How much revenue is raised by the cigarette tax?
TP: For a two-year period it's about $400 million in the context of a $31 billion budget. So. But it's about $400 million and it will probably decline as smoking decreases.
HH: And that was it? That was all it took to get the deal done? Because that's not really that much money.
TP: Yeah, that was basically it. There was some other miscellaneous items but it was kind of a classic tax-and-spend fight. And the Dems wanted to go much higher on spending and of course raise taxes to pay for it, and of course we didn't, and we had to fight to the mat, and unfortunately it went into a first ever shutdown in Minnesota and the public did not react well to that as you might understand, they were very frustrated with everybody.
HH: Well, they blamed Newt and everyone in the Legislature when it happened at the federal level and hopefully they'll blame the DFL in Minnesota...
Second, all actions are voluntary. Including earning income. The reason we tax cigarettes rather than, say, perfume is not that it's voluntary but that it's unlikely people will change behavior in the short run in response to the increased tax. (I.e., demand for cigarettes is price inelastic.) If you want to make money from this tax, you better hope so. Either it reduces smoking and doesn't raise revenue, or it raises revenue but doesn't change smoking behavior. The effect is to reduce smoking more in the long run, certainly, but we're pretty certain that, since demand is inelastic (in most studies -- I've seen some that think it's "unit elastic", or a 1-for-1 relationship between percent change in price and percent change in quantity sold.)
Third, this notion that the externalities are so large from smoking has been disputed. David has been citing Kip Viscusi's analysis, which argues that states are compensated for medical and nursing home costs from smoking already. There's a benefit to smokers dying younger -- they don't burden Social Security, they don't linger in hospitals in their 90s by and large. Cruel logic, sure -- they don't call us the 'dismal science' for nothing! -- but if you are going to add up all the external costs, you need to also add up the external benefits of reduced longevity.
Last, if the budget deficit was as small as Hugh figures out -- and he's right -- why do both of these smart conservatives go right past the other solution, the one the tax pledge was supposed to produce: REDUCE SPENDING. In a $31 billion budget, you couldn't find $400 million of cuts? Why accept the level of spending as fixed??? And they're not cuts, they are simply reductions in the rate of increase in spending. This budget is for $30.5 billion (to be precise); the 2004-05 budget was for $28.2.
An hour after TPaw, James Lileks speaks with Hugh (audio).
HH: You heard your governor on this program about raising taxes. Don't tell me that the right-wing anti-tax people are mad with him for slapping a little tax on cigarettes, are they?
JL: Yeah, that's their job. Of course they are.
HH: Are you upset with that?
HH: Good, OK, just checking. I mean, it's a normal ... you got to tax something, tax smoke!
JL: Well, you don't have... Hugh, you don't have to tax something ... Once you admit that, then for heaven's sake let's tax the very molecules of air we inhale into the cilia of our lungs.
HH: No but you know there are negative externalities to quote the Economist from smoking that are not recaptured by the cost of cigarettes or returned to the public by those who smoke them.
JL: As much as I like the anti-tax pledgers there are some times when you have to bend and if you want to stomp your feet and run away and read your Ayn Rand again, I mean that's fine, but politics is not about purity sometimes it's about getting
Getting things done with other people's money, you mean, $2.3 billion more of it this time than the last biennium.