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 It was subsequently repealed in 1993 after proving to be nothing short of an economic and policy disaster.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.
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