Increased Cigarette Taxes Rarely Produce Promised Revenue

The Thomas Jefferson Institute for Public Policy recently released a new study showing the impact of cigarette tax increases on local government budgets.

The study, The Impact of Cigarette Tax Increases on Local Government Budgets (here), uses budget data published by local jurisdictions as part of the budget process.  This is the second year this report has been issued by the Jefferson Institute.  Among its findings –

Revenues from cigarette taxes continue to decline, despite repeated rate increases.  Virginia’s local governments collected 19.7 percent less in real cigarette tax revenue from FY 2010 to FY 2014 (the latest data available), even though individual local governments raised these taxes more than 50 times over the same period.  Last year’s study found that local governments collected 16.3 percent less in cigarette taxes between FY ’10 and FY ’13.

  • Cigarette tax rate increases raise less tax revenue collections than budget projections or that the percentage rate would imply.
  • Between 2010 and 2015, the number of localities that chose to levy a new tax on cigarettes grew from 80 to 106 – a one-third increase in just five years.
  • The tax increases are changing consumption patterns as consumers seek alternative markets with lower taxes and lower prices.

Cigarette taxes rarely produce the revenue expected by local governments.  Fairly consistently, the tax increases produce a decrease in revenue, don’t meet expectations, miss budget projections or simply produce mixed results and often turn flat or negative in the years following a tax increase.

For instance, in the Town of Vinton, which doubled its cigarette tax in 2014, saw its revenues plunge by more than 44 percent between 2013 and 2016, as smokers drove elsewhere to make purchases.  These new taxes caused two retailers to close and a new cigarette outlet to open just outside of Town limits, driving a further loss of reduced sales taxes.

This happens in both large and small jurisdictions.  Bluefield raised cigarette taxes by 67 percent in FY 2012 and tax revenues fell 14 percent.  Virginia Beach raised the cigarette tax three times between 2010 and 2016, and revenues remain below the level prior to the tax increases.

We expect to see this happen again in Petersburg where the cigarette tax was raised from 10 cents to 90 cents a pack.  While it’s too early to have final numbers, what we do know is that the number of cigarette tax stamps purchased by stores has declined by nearly 30 percent, as consumers likely crossed the city line to purchase products elsewhere.

And we see the reverse is true as well.  In FY 2016, Portsmouth cut its cigarette tax rate by 33 percent.  The budget for that year anticipated revenues would fall, but in fact revenues increased slightly.  The tax cut brought in more revenue, not less.

These numbers are a real world example that tax impacts on the economy are not static.  You cannot raise taxes by a certain percent and expect, automatically, that tax revenues will increase by that same percent.  Indeed, just as our high school economics teacher explained to us, taxes impact the way people spend and invest.  In this case, it seems that raising cigarette taxes likely encourages smokers to drive outside their own city or county seeking less expensive tobacco products. And, as studies show and retailers testify at local government hearings, these smokers also buy others products when they find a store in a lower taxed area.

As municipalities begin the process of developing their budgets for the coming fiscal year beginning on July 1, instead of seeking to raise cigarette taxes whose effect can be temporary or negative, they might be better advised to seek efficiencies in their operations or rely on a general, broader-based tax to fund public expenditures.  Of course, efficiencies are the better course of action.

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Metro is a good investment

As a proud board member of the Thomas Jefferson Institute—an organization that provides thoughtful non-partisan analysis on the most pressing issues facing the Commonwealth—I feel compelled to respond to the December 27th op-ed that first ran in the Jefferson Policy Journal entitled, “Do Metrorail and Virginia Railway Express Really Boost Virginia Tax Revenues by $600 Million?” (Article found here.) While the article specifically called into question the validity of the Northern Virginia Transportation Commission study, the general argument is that Metro is not a good investment for Virginia and it does not warrant additional funding. On this point, I must strongly disagree.

Virginia’s economic and global competitiveness depend upon having a world-class transportation infrastructure in place. Improving mobility and connectivity throughout the Commonwealth whether that be at the Port of Virginia, Dulles Airport, or Metro greatly impacts Virginia’s economy and should be prioritized to ensure the Commonwealth continues to position itself for success in an increasingly competitive global economy.

Right now, a vital piece of this transportation infrastructure is in need of repair. For too long an “if it ain’t broke, don’t fix it” approach was taken in regards to Metro due to the political and jurisdictional complexities that surround the system. This approach cannot persist if Virginia wants to be competitive for both businesses and talent and regain the #1 ranking in best states to do business.

Virginia and Greater Washington have long relied on the federal government to sustain their economies, but since sequestration it has become apparent that this model is no longer sustainable. Thus, it is increasingly important to position the Commonwealth and region to not only compete but to win big economic development opportunities like it did with Nestle in 2017 and could do in 2018 with Amazon’s second headquarters—a win that could bring $5 billion in investments, 50,000 new jobs, as well as a reputation as the entrepreneurial leader on the east coast. It is worth noting that of Amazon’s four priority site requirements in its HQ2 RFP, one is access to mass transit.

Reliable transit helps to attract these new businesses that will directly impact the Commonwealth’s economy, which is why investing in Metro matters. Case in point, Nestle’s new U.S. headquarters in Rosslyn is located on top of a Metro station. This is not surprising when one considers the facts and figures behind the business community’s commitment to Metro in recent years:

• $25 billion of development has occurred near Metro stations over the past eight years.
• $235 billion of property value is within a half mile of Metrorail stations.
• 54% of all jobs in the region are located within a half-mile radius of Metrorail or Metrobus stops.

In addition to attracting new business, we must also ensure that the private sector industries that are already here are well-positioned to thrive and that we continue to retain our highly-educated and talented workforce.

Recent studies have revealed concerning population shifts, especially among millennials, that suggest investing in Metro is also an investment in our future workforce. A report from The Stephen S. Fuller Institute at the Schar School of Policy and Government at George Mason University revealed that Greater Washington lost about 2,000 people aged 25 to 34 from 2015 to 2016, whereas 13 of the 15 largest metropolitan areas across the country grew their share of this critical demographic. Additionally, the Millennial Index done by American University’s Kogod School of Business revealed that commuting continues to be a source of frustration for Greater Washington millennials and is one of the top five factors that influences their attitudes toward the area.

If we do not fix Metro now, Virginia and Greater Washington’s economic security will be compromised and our competitive position will be diminished in both the short and long term. Without Metro, we would need to double the size of the Capital Beltway and double the number of parking spaces in Arlington and the District’s Downtown to merely maintain the current travel conditions. With regional collaboration and leadership from Richmond, Annapolis, and the District of Columbia, we can put Metro back on a safe, smart, and sustainable path forward in 2018. But it’s going to require effective governance and dedicated, sustainable funding to deliver the improvements the system needs.

As someone who has served as chair of the Fairfax Chamber of Commerce, the Greater Washington Board of Trade, co-chair of the Joint Washington Metropolitan Area Transit Authority Governance Review Task Force, and as the Commonwealth’s representative on the WMATA Board of Directors, I have seen first-hand the powerful impact of Metro on the economy of Virginia—an impact certainly worthy of statewide support.

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The Doctor Is In…. And He Wants to Expand Medicaid

With a near 50/50 balance of power between Republicans and Democrats in the General Assembly, Governor-elect Ralph Northam will be in a much better position than his predecessor Terry McAuliffe to enact Democratic priorities. And what are those priorities? As he told NBC 4, Medicaid expansion tops the list.

Said Northam: “No family in Virginia should be one medical illness away from financial demise so, Medicaid expansion is very important and I will do everything I can to make that happen.”

We can all agree on the desirability of making health care affordable and accessible for all Virginians. It’s not so clear that expanding Medicaid is the best way to accomplish that goal. I have blogged in the past about the inadequacies of the Medicaid model, which has not demonstrated an ability to substantially improve medical outcomes. Among the more obvious problems: While Medicaid expansion provides coverage to the uninsured, it does not increase the supply of primary care physicians willing to take on Medicaid patients for whom they are paid 30% to 60% less than privately insured patients.

Despite below-market reimbursement rates, the cost of Medicaid expansion is considerably higher per patient than anticipated when the Affordable Care Act was enacted several years ago. The table below, taken from an article in the “Handbook on Healthcare Reform” published by the Thomas Jefferson Institute for Public Policy (TJI) last month, shows how Medicaid actuaries have consistently revised upward their cost projections since FY 2013.

The 2013 report projected that newly eligible adult Medicaid patients would cost $3,625 on average. By 2016, the figure had risen to $5,926 — a 63% jump. If Medicaid expansion was unaffordable four years ago, it’s even more unaffordable now. Despite their political setbacks, Republicans are highly unlikely to roll over on this issue.

It’s not as if states have no other options to improve affordability and access. The TJI report discusses several. They include eliminating mandated benefits so insurance companies can offer bare bones policies; removing barriers to healthcare technology innovation; rolling back onerous Maintenance of Certification requirements that encourage physicians to retire early; reforming the medical liability system that prompts physicians to practice defensive medicine; encouraging transparency in pricing so consumers can push back against expensive providers; abolishing the Certificate of Public Need process so physicians can provide high-quality, lower-cost outpatient surgery; promoting telemedicine; enabling Direct Primary Care that strips out third-party-payer middlemen and administrative costs; and repairing the broken Medicaid delivery model.

Most of the TJI essays were generic, not specific to the Old Dominion. As it happens, Virginia has taken limited steps toward implementing some of the ideas in the report, but much remains to be done.

The health care sector is a dense jungle of special interests, however. Hospitals, insurers, pharmaceutical companies, employers, physicians, and a welter of allied health professionals work doggedly to shape legislation to their benefit. Sadly, ordinary patients have no organized group representing their interests.

As a physician, Northam has a keener understanding of the issues confronting the health care sector than most lawmakers. He enjoys a unique opportunity to reshape Virginia’s health care sector in a way that lowers costs and improves outcomes for all Virginians. It would be a shame if he expends all his political capital to capture the dubious benefit of Medicaid expansion when so many alternatives lie fallow.

(This article first ran in Bacon’s Rebellion on January 4, 2018)

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Tax Cuts Likely to Lead to Records for Recovery

2017 tax reform bill and the budgetSometimes it’s hard to believe that this expansion is already more than 8 years long–only 18 months short of the record 120-month expansion that occurred from March 1991 to March 2001.

A few analysts are concerned about a recession occurring over the next year or two. From our view, the tax cuts and reform just passed by Congress and signed into law by President Trump increases the probability that this expansion will enter the record books.

Real gross domestic product (GDP), the broadest indicator of economic activity, is expected to expand by 2.3 percent in 2017 according to our forecasts after growing just 1.5 percent in the prior year.

Next year is stacking up to produce the fastest growth of this recovery as we see it. We expect real GDP to advance 3.0 percent in 2018 and 3.3 percent in 2019.

Most economists have increased their outlook for growth over the next two years, in large part, due to the tax cuts and reform, but the expectations vary based on their assumptions about how businesses and consumers will react to the tax cuts.

We expect the reduction in the corporate tax rate will enable businesses to invest more in computers and equipment which will enhance productivity. This will initially increase employment for businesses making these goods. It will also eventually lead to wage gains for workers who are now more productive.

The increased wages, employment, and individual tax cuts will all lead to more consumer spending. With consumer spending making up about two-thirds of GDP, consumers are an important factor in economic growth.

The state and Richmond metro area will also benefit from the faster national growth. When the final employment numbers are in, we expect Virginia employment to increase 1.4 percent in 2017 and 1.5 percent in 2018. That compares to 1.5 percent and 1.2 percent in the nation—the slower growth in 2018 is largely due to slower labor force growth.

We expect the Richmond metro area to continue to grow slightly faster than the state and nation. Employment is expected to grow 1.6 percent in 2017 with health care adding almost 3,000 jobs. Also adding over 2,000 jobs is a sector called administrative and support and waste management and remediation services. The growth in this sector is mainly driven by firms that provide temporary help services and professional employer organizations.

Looking ahead to 2018, we expect employment in the Richmond metro area to advance by 1.7 percent with health care continuing to provide the largest number of new jobs.

(This article first ran in the Richmond Times Dispatch on January 1, 2018)

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Can’t Win for Losing

If we continue to burn coal to generate electricity, we might destroy the Earth’s capacity to support life. If we switch to natural gas, then fracking might poison the water and set our faucets on fire. Biomass sounds good, but burning it also releases carbon dioxide into the atmosphere. Hydroelectric power requires dams, which destroy fish habitat. Solar panels take up too much space, and are too expensive to power a nation.

That leaves wind power, one of today’s favorites. But as we know, wind turbines chop up eagles and bats and migratory birds. Some people say the noise causes bizarre health problems. And now, there is another reason even wind may not work. Two new studies claim that man-made global warming is actually causing the wind to diminish significantly in some areas.

As one reporter wrote, wind energy is supposed to help fight climate change, but “climate change is fighting back.” Both studies conclude that estimates of wind energy’s potential may be flawed, because our use of energy is reducing the wind itself. As one of the authors put it, “Assessments of wind energy resource are usually based on today’s climate, rather than taking into account that anthropogenic greenhouse gas emissions continue to modify the global atmospheric circulation.”

These are real, serious scientific studies. The first was published November 24 in Nature Scientific Reports by three Harvard researchers, and the second, authored by three researchers in Boulder, was published December 11 in Nature Geoscience.

As the Washington Post wrote this week, “The world is turning more and more to renewable sources of energy… to fight climate change. But what if climate change itself alters the distribution of wind, or sunlight… or river flows, and so changes or even shrinks the potential of these energy sources?” It just seems that we can’t win for losing. No source of energy is without problems, so what are we to do?”

I admit to feeling a little cynical about this today, because last night’s freezing cold wind messed up my Christmas lights, and I spent half the night outside in a frigid gale trying to put a little Christmas tree back together. So when I hear that the dreaded climate change may lead to warmer temperatures and less wind, I’m completely on board. In fact, it makes me want to stand outside with an aerosol can pointed at the atmosphere to make sure I’m doing my part to help.

The genuine skeptic will recognize, however, that there is a much larger question raised by these studies – and the scores of others that will surely follow, as long as there are government grants to university researchers. That is, will there ever be any source of energy upon which everyone can agree?

The answer is no, because not everyone shares that lofty goal. Instead, many activists are united by the notion that mankind’s presence is always bad for the environment. People are not part of the environment in this theory; they are an intrusion that should be stopped whenever and wherever possible. That requires government control, and nothing has more potential to provide that control than the concern about global warming. If everything mankind does can be said to affect the climate, then climate regulators would be able to regulate everything mankind does. So, climate regulators fund scientific studies, which inevitably back this view (he who pays the fiddler calls the tune). Such studies generate public concern, and public policy will follow.

Note a critical distinction in the two new wind studies. This wind reduction is not happening the same everywhere, but is especially noticeable in the two countries that have spent by far the most money developing wind energy – China and the U.S. Some readers might infer that it’s OK to continue investing in wind power in other countries, but may not be as effective here.

That hints eerily at similar policies that result in logging, drilling, mining, and manufacturing in other countries, so we can “protect” our own domestic resources. Those activities impact the environment anywhere, of course, but our conscience remains clear if we export those consequences elsewhere.

Some Americans may want to return to an earlier lifestyle, where they keep a milk cow and a couple hogs, raise beans in their own backyards, and eat year-round by canning a cellar full of mason jars. Me, I prefer grocery stores, cars, and comfortable homes powered by affordable energy. And if that results in slightly warmer temperatures and a little less wind, I’m probably OK with that.

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