Butt Out: Philadelphia’s cigarette tax will fail and make the city more fragile.
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Incentive Taxation

Butt Out: Philadelphia’s cigarette tax will fail and make the city more fragile.

Philadelphia, Pennsylvania even after decades of heavy lifting by the taxpayers is still lurching from crisis to crisis, with the root cause based in fiscal uncertainty.  Philadelphia and its nearly insolvent school district still has not discovered a true “fit for purpose” revenue source that will provided - at the very least - revenue stability.  Poor, working and middle-class people pay a larger share of their incomes on tax than in nearly any other American city.  Turning to those who can least afford to pay ought to be the last choice, but ironically in Philadelphia it’s nearly always the first choice.
 
With some of the worst credit ratings for a big city in the US, taking on more debt still seems to be the solution of choice.  Debt of course is a double-edged sword: you get the money but only on Wall Street’s terms, and they aren’t pretty. Already, the School District has taken on yet more debt.
 
This year, with a massive shortfall to total about $250,000,000 the school district, the city and its legislative representatives in this capital of Harrisburg pushed through a bill that continues the tradition of city and state officials showing their concern for the poor by taxing them especially hard.
 
Next step?  A higher cigarette tax
 
It’s easy to propose something like the cigarette tax.  Those interested in exercising control over vice have no compunction about penalizing a product they likely do not use, and it’s a handy use of a traditional American puritanism that censures those who do what you don’t want them to do.  It’s reminiscent of New York Mayor Bloomberg’s “Big Gulp” tax that penalized giant sodas, but exempted Vente Caramel Machiattos.
 
The law of unintended consequences
  
So, a two dollar a pack tax on cigarettes was enacted into law in September 2014 with the signature of Governor Corbett.  The choreographed celebration intertwined the conflicting goals of such attacks: raising lots of money ($49,000,000 predicted), and reducing smoking (won’t that reduce the revenues?).
 
Luckily, smoking and its economics has been studied intensely, and it only takes arithmetic to get to the bottom line.  The best guess is that of the 1,090,000 adults in Philadelphia, 25% are smokers, with estimates going to as high as 40% in low income neighborhoods[i].  That 25% represents a tax base of 272,125 people.  Because such a narrow base is deployed to pay these revenues, it flies in the face of the most establishment and traditional definitions of good tax policy. 
 
This is not tax policy, it is scrounging for loose change in the sofa.
 
Predictable effects
 
Border hopping.  Philadelphia happens to be in the middle of the biggest urban megalopolis in the Americas.  There is no such thing (and there will be no such thing) as fixed and static tax rates across municipal, county and state jurisdictions.  In Philadelphia, the new cigarette tax is not only avoided by driving to lower tax jurisdictions, one can walk across the street from Philadelphia to Montgomery County and avoid the tax. 
 


Pity the Poor Smoker Palace: on the Philly side of the Tacony-Palmyra Bridge
 
Ironically, one thing that cigarette prices had going for them before the law passed was a lower cigarette tax in Philadelphia compared to next-door New Jersey.  With this change (see map), small corner shops and businesses that have enjoyed a small-scale advantage by selling cigarettes to New Jerseyans will now see that advantage disappear; the already inexpensive liquor stores at the foot of each bridge on the Jersey side will probably see a business boom as New Jersey’s cigarette tax disadvantage disappears.  Shopping for booze and butts will become a one-stop shop in Jersey.
 
Delaware’s advantage will only increase.  Certainly, it’s quite possible that legislative representatives of suburban Philadelphia counties were happier to vote for the bill after hearing from cigarette vendors in their counties (see map)[ii].


 
Erosion of respect for law and tax administration.  New York City has shown that an incredibly high cigarette tax creates crime and criminals in poorer neighborhoods.  Not only does New York state have a cigarette tax of $4.35 a pack, New York City has an added cigarette tax of $1.50 a pack, for a whopping grand total of $5.85 a pack.  It should come as no surprise that New York City has a thriving industry in smuggling, the extent of which was discovered in a study with a rather novel method of picking up discarded cigarette boxes and looking at the tax stamp source[iii].  Anyone who has ever driven towards the North and South Forks in Long Island has seen lines of cars waiting their turn at the various Native American reservations that sell cigarettes tax-free[iv]. No doubt, such a study can be easily replicated in Philadelphia in some years’ time.
 
 
Tax the poor, they won’t mind. Whether one likes smoking or not, it is often a brief escape for people living in poverty.  It is reasonable to expect that Philadelphia will see levels of smuggling on a New York City scale.  In the bodegas and corner stores of Philadelphia, in neighborhoods that no one cares about, outdoor, non-sanctioned cigarette commerce will likely flourish. Competition for location based on the laws of economics but outside the new law will cause trouble for people who are too used to experiencing trouble without serious help from their elected officials.
 
Philadelphia should also be concerned that the "Loosie"[v] culture will quickly take root here in the city where policing resources are already stretched.  That's the direct reason the New York City police got into an altercation with Eric Garner leading to his to death on Staten Island, simply because he was breaking the law by selling single cigarettes; the NYPD had ordered a crackdown.
 
From the Whiskey Rebellion on up, evasion of excise taxes is a long time sport for disadvantaged citizens.  A cigarette tax won't make the money they think it will, and is targeted on those least able to afford it.  If cigarettes are that bad, make it illegal.  That worked during Prohibition right?
 
Next time: A fundamentally sound revenue source.


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