Does the law of economics work the same for cigarettes as it does for inventory?

This question is critical to determine how much damage may be done to Louisiana’s private sector economy by the tax increases on employers currently moving through the Legislature.

Most people would readily agree with the notion that the more you tax something, the less inclined people are to buy it.

President Ronald Reagan once said, “The more government takes in taxes, the less incentive people have to work. What coal miner or assembly line worker jumps at the offer of overtime when he knows Uncle Sam is going to take 60 percent or more of his extra pay? Any system that penalizes success and accomplishment is wrong. Any system that discourages work, discourages productivity, discourages economic progress is wrong.”

He went on to add, “If, on the other hand, you reduce tax rates and allow people to spend or save more of what they earn, they’ll become more industrious; they’ll have more incentive to work hard, and money they earn will add fuel to the great economic machine that energizes our national progress. The result: more prosperity for all – and more revenue for government.”

Considering Reagan’s advice, it is worth looking at the current debate on taxes this legislative session.

Rep. Harold Ritchie has authored legislation, House Bill 119, which would raise the state’s cigarette tax by 32 cents. The current state tax on cigarettes is 36 cents, among the lowest rates in the entire country.

The fiscal note for the legislation indicates that Louisiana will gain roughly $68 million in increased tax receipts by raising this tax by 32 cents. This tax increase has not encountered much resistance in the Capitol, only receiving criticism by certain health groups that want to see the tax increased much more. These groups want the cigarette tax increase to be much higher because they know that the higher the tax, the less likely people will smoke.

The guidance by Reagan three decades ago permeates this entire discussion of taxes. The higher the tax on a product, the less people will want to buy it. In fact, even the drafters of the fiscal note to Ritchie’s cigarette tax bill agree with this economic principle.

When discussing previous increases of the cigarette tax, the fiscal note shows revenue collections were lower than previous collections due to the tax increase’s negative impact on the consumer’s willingness to purchase the product.

The note explains that, “In the last state episode (2002), the new collections level was only about 82 percent of what would be implied from the simple average yield, and only 54 percent with the last federal episode (2009). That is, total tax-paid sales decline when prices increase (in these cases from a tax increase) as consumers avoid the tax by purchasing the product in lower tax locales and reduce real consumption of the product altogether.”

What a novel concept. The more something is taxed; the less people want to use it. In fact, the fiscal note states people will even take the trouble to go to a lower taxing locale to purchase a product in order to avoid paying a higher tax. The same economic principle is true for a business, and it is amplified greatly for employers because we now compete in a global economy for investment.

For instance, the Legislature is strongly considering bills to significantly raise taxes on inventory. The current draft of the bills would lead to a reinstatement of almost half of Louisiana’s inventory tax. House Bill 629 by Rep. Katrina Jackson would repeal 20 percent of the inventory credit; while House Bill 805 by Rep. Bryan Adams would delay an additional 25 percent of the refundable portion of the inventory tax credit.

The inventory tax is widely seen by experts as a disincentive to investment, expansion, capital accumulation and growth. Louisiana is one of only 13 states that levy an inventory tax, which is why the state has offered an inventory tax credit since 1991. Instead of simply repealing this harmful tax, the state chose to mask its negative impact on the economy for the last few decades with a dollar-for-dollar credit.

Legislative efforts to now drastically increase taxes on inventory will send a strong incentive to employers to scale down their inventory in Louisiana or move their products altogether out of state, which is exactly the wrong message to send to the private sector as it continues recovering from the national recession.

The manufacturing renaissance taking place in Louisiana is exciting but very much in its infancy. These manufacturing investments will require massive amounts of materials and goods to make the finished products that will be sold throughout the world. For generations, these investments will provide countless jobs and opportunities for service and support industries across the state. This growth potential is eerily similar to the economic approach used by Reagan in the 1980s that led to America’s resurgence. This exciting potential all depends on Louisiana continuing to build a regulatory and tax environment that welcomes these investments and encourages the types of expansions that are bound to come.

Our main competition to keep these jobs and investments are other states and countries. They do not like one bit that Louisiana has started to win some of these economic battles and they hope that we shoot ourselves in the foot this legislative session by raising taxes on inventory.

Let’s not do them that favor. Let’s not tear down that economic wall we are building in Louisiana.

Ironically, a new tax on inventory would not only throw sand in the gears of this manufacturing renaissance, it would also tax the very sand and gears used to do so.