Pennsylvania Politicians Are Paying Close Attention to E-Cigarette Tax Revenue

In 1988, Senator Bob Packwood asked the Congressional Joint Committee on Taxation how much revenue the federal government would collect if it imposed a 100% income tax on earnings over $200,000.

The committee completely ignored the fact that people change their behavior when tax rates change, and answered that such a tax would generate more than $1 trillion in revenue over five years.

But when income is taxed at 100%, people stop working. A 100% tax would not collect anything close to $1 trillion. In fact, it would collect almost nothing. Packwood knew this; he simply wanted to point out the mean-spirited foolishness of those who push for higher taxes without even considering the consequences.

In 1991, committee analysts came back, this time claiming that a 10% “luxury tax” on yachts, private planes, and expensive jewelry would raise an additional $500 million per year. But when the dust settled, tax revenue had actually fallen by $24 million. As before, congressional analysts assumed people would continue buying the same amount of luxury goods after the tax increase as they had before.

What people actually did was what any sensible person could have predicted — they cut back on luxury purchases. In fact, consumers reduced spending so much that workers in the luxury goods industry were laid off, leading to even more tax losses when unemployed workers stopped paying income tax.

Fast forward to October 1 of this year, when Pennsylvania imposed a 40% tax on e-cigarettes and related products. Governor Tom Wolf claimed the point of the tax was to increase state revenue. But Wolf made the same mistake the tax committee made in 1988 and 1991.

He assumed that in response to a 40% tax, vapers would not change their behavior. But every sensible person knows they would. Vapers would simply buy their products online from out-of-state suppliers. That 40% tax rate would increase exactly no revenue at all. In fact, Pennsylvania’s tax revenue would decline because 300 vape shops across the state would close, destroying at least 300 taxpaying jobs, and probably more.

We want to believe our elected officials are not fools. But in this case, stupidity is the charitable explanation. A more likely explanation is that the governor and the legislature believe they are entitled to decide how free citizens of Pennsylvania should live. They have decided that you should not have e-cigarettes, and they are doing everything they can to make them harder for you to get. With this tax, they are driving an entire industry out of Pennsylvania because they have decided they do not like it.

That is the real issue. When politicians decide they are entitled to tell people how to live, what people actually want no longer matters. The political class knows this is hard to defend, which is why they often lie to us when imposing these rules. As for the vaping tax, it will leave us with no additional tax revenue and more unemployed citizens. But the political class will have gotten what it wanted, and for them, that seems to be all that matters.