I’ve often wondered exactly how severe is Congress’s case of
historical amnesia. In late 2005 we found out that many members of
Congress clearly couldn’t remember anything previous to 1980, as
witnessed by their call for 1970s-type price controls on oil. But
last week we learned that Congress’s historical amnesia is much
worse than anyone feared. Clearly it extends back to as recently as
the early 1990s.
Nineteen-ninety was the dreadful year in which President George
H.W. Bush abandoned his “Read my lips, no new taxes” pledge to cut
a deal with Congressional Democrats to increase taxes. Among the
new taxes created by that deal was an excise tax on “luxury items.”
This “luxury tax” was imposed on goods such as jewelry, furs, and
yachts. It was subsequently repealed in 1993 after proving to be
nothing short of an economic and policy disaster.
Last week members of the Senate Finance Committee including
chairman Max Baucus (D-MT), Jay Rockefeller (D-WV), Chuck Grassley
(R-IA), and Orrin Hatch (R-UT) cut a deal to increase the funding
for the State Children’s Health Insurance Program (SCHIP)
to the tune of $35 billion over five years. To generate this money,
the deal imposes a new luxury tax on cigars.
To understand why the luxury tax on cigars is a terrible idea,
we need to revisit the history of the luxury tax of the early 1990s
— a history that congressional members’ severe amnesia is
preventing them from remembering. Class warfare thinking infected
the luxury tax of 1990. Think of the multimillionaire whose wife
was wearing a gold and diamond necklace, and a fur coat. They were
getting into their limousine to drive to their 100-foot yacht on
which they would spend their weekend. How was it possibly fair that
the rich spend so lavishly on such unnecessary items when Joe
Sixpack struggled just to put food on the table? Imposing a luxury
tax on those items was a proper way to even things out, to make the
rich pay their “fair share” to fund the government programs that
helped Joe Sixpack.
Unfortunately, Congress never bothered to consider that
increasing the tax on these items, and thereby increasing the price
of those items, might change the behavior of said rich people.
(Indeed, many members of Congress stubbornly refuse to
ever acknowledge that taxes ever affect
behavior.) But said rich people had other ideas. If the price of
jewelry, furs, and yachts suddenly increased, then maybe purchasing
a winter home in Florida seemed like a much better deal. Or maybe
those rich people would take a shopping trip to other parts of the
world, where the price of jewelry, furs, and yachts were now much
more competitive thanks to the U.S. Congress.
And if members of Congress never considered that the luxury tax
would discourage rich people from buying luxury items in the U.S.,
then they surely never considered that such an effect might not be
so good for the Joe Sixpacks that worked in the industries
producing luxury items. A Joint Economic Committee study later
found that 330 jobs in the jewelry industry and 7,600 jobs in the
yacht industry were lost thanks to the luxury tax. Perhaps the
greatest irony was that in 1991 the federal government paid out
over $7 million more in unemployment benefits to those workers than
it collected in luxury tax revenues.
Fast forward to 2007. The current tax on cigars is a maximum 4.8
cents per cigar. The new proposed luxury tax on cigars is 53.13%
per cigar, up to a maximum tax of $10 per cigar. Thus, if you like
cigars worth $20, you’d be facing a staggering tax increase of
20,733%. By comparison, the luxury tax of 1990 was an increase of
only 10%.
No doubt that supporters of this tax will claim that it will
have little impact on cigar purchases since cigars contain
nicotine, which is addictive. But nicotine has minimal impact if
the tobacco smoke isn’t inhaled, and in my experience most cigar
smokers do not inhale. Thus, many cigar smokers should have little
trouble quitting if they find the luxury tax has increased the
price of cigars beyond what they want to pay. Others will continue
smoking cigars, but will reduce their costs by smoking fewer of
them. And, of course, some cigar smokers will avoid the tax by
buying cigars abroad, a purchase made all the easier by something
that didn’t exist in 1990, the Internet. Why, here’s a page that lists 52 websites for buying cigars in
Europe. In short, this new luxury tax will cause a precipitous
decline in consumption of American-produced cigars.
Of course, about as many people are going to shed tears for the
person buying a $20 cigar as they did for the rich person buying a
yacht. But they might feel a lot of sympathy for the Joe Sixpacks
who work in the cigar industry. Exact numbers about how many people
work in the cigar industry today are hard to come by since the
federal government stopped collecting data on cigar producers a few
years ago. In 1999, the Census Bureau reported that 3,845 people
worked in the cigar industry. Norm Sharp, president of the Cigar
Association of America, guesstimates that the industry now employs
between 7,500 and 10,000 workers, a plausible number given the
growth in the industry in recent years. Whatever the number, what
is clear is thousands of cigar employees face a fate similar to
workers in the yacht and jewelry industries in 1990.
That is what Congress’s severe case of historical amnesia yields
— an astronomical tax increase leading to workers losing their
jobs. But try to look at the bright side. If those cigar workers
lose their jobs, the resulting decline in their incomes will mean
that their kids will have no trouble qualifying for the State
Children’s Health Insurance Program.
