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It’s Taxes, Stupid.

August 12, 2010

We never liked the phrase: “It’s the economy, stupid.”

Maybe it was our mothers who counseled against name calling with the help of Dial soap. Maybe it was a wonkish desire to engage with something more than snarky quip. Or maybe it was the way this particular expression proliferated after the ‘92 presidential race. 

Whatever it was, we’ve never used the phrase … until now that is. 

We have good reason to do so. The issue (again) is New York tax policy. We’re talking about taxes on cigarettes. And no, we’re not defending the unhealthful habit.   

We’re just saying that there are levels of taxation that can drive people to evade a tax. Duh, right? 

Well, no. State policymakers just don’t get it. They keep insisting on taxing “evil” products. “We’ll deter consumption and raise revenue for needed programs and services – it’s a win-win,” they say. 

It works this way only up to a point. In this regard, you may be able to tax such products a little bit and perhaps get the desire results. But after that, the model quickly and completely collapses. 

The case is point is tobacco. New York recently jacked up taxes on a pack of cigs. It now costs about $11 a pack in New York, compared to about $5 in New Jersey and even less on Indian reservations. 

And guess what is happening?  The Post has an article today about it: “Cig-taxed NYers Run for Border.”   

Sales are down almost 50 percent, and it’s not because people have quit. They are simply stocking up on cigarettes in non-taxing or lower-taxing jurisdictions.   

So the only thing that has happened here is that we have driven business out of the state. 

The effect is most pronounced with cigarettes, but it is not an isolated phenomenon. High taxes on gasoline and soft drinks drive business out of the state, as well. 

Another classic example involves the fixed based operator (FBO) segment of the airline industry. To help close a budget deficit, New York applied a hefty “burn rate” tax on airplanes taking off from New York airports. As a result of this tax, pilots began flying over New York to fuel up elsewhere. New York FBOs (the equivalent of service stations for airplanes) lost business and closed down – with a significant loss of jobs and economy activity. 

It wasn’t a win-win at all. It was and is lose-lose.

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