The MC: The Mackinac Center Blog

Mackinac Center Experts Show Cigarette Tax Increase is Counterproductive

Michael LaFaive and Todd Nesbit, Ph.D. cited in Providence Journal

The May 8th edition of the Providence Journal features an article written by Director of the Morey Fiscal Policy Initiative Michael LaFaive and Board of Scholars member Todd Nesbit, Ph.D.

The experts show how smokers turn to lower-cost alternatives when the price of cigarettes increase.

LaFaive and Nesbit show smuggling rates among all states in a statistacal analysis found here.

Snug as an Official Bug in a Rug

Politicians can find themselves deciding things of low value

Excessive cynicism can be an occupational hazard of those who pay close attention to actions of legislatures and politicians. Honest debate over important policy issues is important, but political observers can be quite disappointed if they consider everything their elected officials work to decide.

For example, on April 28 Rep. Edward McBroom (R) introduced a bill to establish the ladybug as the official insect of Michigan. The proposed legislation does not specify any particular variety, although Wikipedia reports some 5,000 types worldwide.

The bill could trigger a Battle of the Bugs on the House floor, because in recent years no fewer than four bills have been introduced to declare the monarch butterfly to be the state’s official insect. The conflict could grow even more intense, because in 2010 legislation was introduced to establish as the green darner dragonfly as the official state bug.

These gratuitous acts of officialdom are hardly unique, and sometimes they even generate lobbying and contentious committee hearings, as occurred when a law was proposed to establish an official state Scottish tartan. But which tartan? A clash of the clans was narrowly averted when Gov. Jennifer Granholm took executive action to establish an official tartan, heading off what might have been a reenactment of the tragic rising of ’45.

There really is an apparent earnestness of those involved as you can tell by the video (below), but does that make it a proper function of government?

Other acts of officialdom introduced (but not necessarily passed) by lawmakers involved an official state poem, poet Laureate, birding county (that would be Iosco), official bird-of-peace, cookie, nickname and more. One observer proposed that lawmakers should officially declare themselves to be the state’s official busybodies.

It all gives weight to the claim of part-time legislature proponents that Michigan’s full time lawmakers may have too much time on their hands.

Guest Post: Kansas Excise Tax Hike Proposal a Bad Choice

The unintended consequences of higher taxes

The following blog post was first published by the Kansas Policy Institute on May 4, 2015.

Various proposals would raise excise taxes on cigarettes, one by as much as $1.50 per pack among other items. This is a bad — if not irrational — choice for Kansas given the large raft of unintended consequences associated with it for little in the way of public health advances. 

Raising cigarette excise taxes by almost 190 percent would mean Kansas would be surrounded by states with lower — sometimes dramatically lower — excise taxes. The tax-driven price difference between cigarettes in Kansas and nearby states will represent an opportunity by both casual and organized smugglers to profit handsomely from tax avoidance and evasion.

The Michigan-based Mackinac Center for Public Policy annually estimates the degree to which cigarettes are smuggled in most states. Its statistical model tells us that through 2013 Kansas had a smuggling rate of 15 percent, ranking the Sunflower state 19th among the 47 in the study.

But that estimate reflects a tax rate of 79 cents, not $2.29 per pack. At the higher rate, however, the model tells us that Kansas’ smuggling rate will leap to a stunning 46.5 percent of the market. That is, of all the cigarettes consumed in Kansas after this excise tax increase nearly 45 percent will be a function of tax avoidance or evasion. At this rate Kansas will sport the third highest smuggling rate in the nation, behind New York and Arizona.

It is not hard to see why. In addition to being surrounded by lower tax states Kansas is located next door to the lowest tax state in the union, Missouri, at just 17 cents per pack. This is probably why the model also tells us that 26.5 percent of total smuggling will be of the “casual” variety, such as individuals grabbing a carton while in other areas of KCMO.

Lest the reader believe that these estimates are outrageously high consider that the Mackinac Center is not the only institution attempting to measure smuggling rates among states. On February 19 of this year the Institute of Medicine and National Research Council published a study on tax evasion and tax avoidance and pegged Kansas’ 2011 smuggling rate at 21 percent, far higher than the Mackinac Center’s own estimates.

The study, titled, “Understanding the U.S. Illicit Tobacco Market: Characteristics, Policy Context, and Lessons from International Experiences” pegs the national market for illicit smokes at between 8.5 percent and 21 percent. The latter figure is cited from others scholars’ “plausible estimates” published in 2013 and based on data from 2009 and 2010.

These smuggling numbers are why lawmakers should never confuse changes in legal paid sales of cigarettes with quitting. Time and again burgeoning illicit markets undermine the health goals of very well-intentioned public officials.

In his 2004 study titled “Cigarette Tax Avoidance and Evasion,” economist Mark Stehr reports that up to 85 percent of the after tax change in legal paid sales can be attributed to avoidance or evasion. That is, official sales are declining, but people aren’t necessarily quitting.

The authors of a 2014 study in the academic Journal of Economic Inquiry titled “Do Higher Taxes Reduce Adult Smoking?” argue that “considering all the evidence, we conclude that there is insufficient justification for the widespread belief that raising cigarette taxes will significantly reduce cigarette consumption among adults, even young adults.”

The reason is probably fairly straight forward. People like to smoke and are willing to turn to less expensive roll-your-own products or to the illicit market or both to acquire tobacco.

Of course, smuggling is not the only unintended consequence of higher tobacco taxes. High tax states like New York or Michigan have also seen violence against people, police and property as well as thefts at the retail and wholesale levels.

Lastly, Kansas doesn’t need to raise taxes on this or any other activity. The Kansas Policy Institute informs us that the state is planning to spend nearly $1 billion more (adjusted for inflation) than it did in 2004.

The budget must be balanced but perhaps lawmakers should kick the spending habit before taxing those with a smoking habit.

In a news story titled “Nearly half of Obamacare exchanges are struggling over their future,” The Washington Post reports the following:

Nearly half of the 17 insurance marketplaces set up by the states and the District under President Obama’s health law are struggling financially, presenting state officials with an unexpected and serious challenge five years after the passage of the landmark Affordable Care Act.

Many of the online exchanges are wrestling with surging costs, especially for balky technology and expensive customer-call centers — and tepid enrollment numbers. To ease the fiscal distress, officials are considering raising fees on insurers, sharing costs with other states and pressing state lawmakers for cash infusions. Some are weighing turning over part or all of their troubled marketplaces to the federal exchange, HealthCare.gov, which is now working smoothly.

That last claim — “the federal exchange is now working smoothly” — is a stretch, given that important parts of the “back end” of the process by which subsidies are determined and insurance companies are paid (or not) are still “under construction,” but I quibble. The important fact for Michigan is that our Legislature did not create a state exchange, and in consequence likely avoided a mountain of grief.

Longtime, free-market health policy analyst John Goodman explains in Forbes why the exchanges are (and always will be) struggling, with a state-by-state roundup of their specific woes.

Michigan came close to creating a state Obamacare exchange. The Senate passed a bill to do so, and only in waning days of the 2011-12 legislative session did the House leadership capitulate to the reality of a reluctant Republican caucus. (The House Speaker hadn’t yet got in the habit of violating the “Hastert rule” and rolling the caucus majority by passing bills with Democratic votes, which is how Medicaid expansion became law the following year.)

There are no “wooden stakes” in Lansing though — bad policy proposals never die. If the U.S. Supreme Court rules in June that Obamacare subsidies can only be provided through an exchange created by a state, we can expect an explosion of pro-Obamacare activism pressuring Michigan legislators to “fix the problem” by creating a state exchange.

With Senate Bill 248 the Michigan Legislature is attempting to address a number of problems with the auto insurance market in the state. Michigan’s no-fault system creates misaligned incentives, resulting in auto insurance rates that are among the highest in the nation. There is also a larger question of why we treat severe injuries from car accidents differently than we treat the similar injuries from other types of accidents.

The unlimited personal injury protection provision in the current no-fault system creates an incentive to provide very expensive care, rather than provide affordable and effective treatment aimed at quickly restoring the victim to health. This typically results in medical bills charged to PIP insurance that are significantly and inexplicably greater than those charged to other insured methods, such as Medicare or workers’ compensation. In an earlier study it was found, for example, that a neck MRI in Detroit paid for by no-fault cost $3,258, while the same procedure paid for by workers’ compensation insurance was $769.

The reason for this is that if you suffer a severe spinal injury in a car accident, there is no limit to the charges incurred in treating you. But if you suffer the same injury by falling off a ladder, there is. Realistically, what we do in Michigan is to tax motorists to cover catastrophic, auto-related injuries without any constraints on the cost of treatment. This is done in a convoluted fashion, through a per-vehicle assessment that funds the Michigan Catastrophic Claims Association.

But the state is considering some reforms with Senate Bill 248, and these are a move in the right direction. One positive aspect of Senate Bill 248 is that it is reintroducing a discussion of why the state is such an outlier in the way its auto insurance market operates and how to deal with the lack of affordability of insurance in places like Detroit. Michigan is only one of 12 states to have no-fault auto insurance and is the only state to have unlimited PIP. New York has the second highest PIP limit of $50,000.

There are provisions of the bill that will act to reduce insurance costs. Among these are attempts to set limits on rates. Of course, as with any attempts to set prices, there are likely to be unintended consequences. The movement from the MCCA to a new entity will provide more transparency, but it will probably be more subject to political pressures with regard to both claims and assessments.

The establishment of an insurance fraud program will, if operated effectively, reduce fraud, lowering treatment costs and insurance premiums and catastrophic claims assessments. Limits on certain payments for attendant care will have some effect on the incentives to provide more care than is necessary.

Overall, Senate Bill 248 will probably result in lower auto insurance costs for car owners in Michigan. However, policymakers should also consider moving away from a no-fault insurance system and establishing limited PIP coverage, just like every other state in the country. When it comes to insuring the costs of catastrophic injuries, we should treat them the same, regardless of how they were incurred.

Reasons to Reason

Analytical thinking is essential in policy debates

A study claims global warming is killing frogs. But that conclusion is speculative.

With so many complex policy issues, how do we decide which are worthy of our support or deserve to be opposed? Environmentalism, my specialty, is rife with policy initiatives that are often based on emotional appeal, rather than well-reasoned articulations of facts.

As a boy, I read Isaac Asimov’s science fiction classic “Foundation” series that featured psychohistory and symbolic logic. I was fascinated by how the Foundation applied symbolic logic to political documents and treaties to interpret what was really being said. In one situation, the Foundation reduced the fine print of a five-page treaty to two statements: “Obligations of Anacreon to the Empire: None! Powers of the Empire over Anacreon: None!”

Reasoning is an acquired skill that can be learned, developed and honed. With all this information at our fingerprints, we ought to be better able to reason our way to conclusions than ever before. But it’s still difficult to reason — to think clearly and logically — because we are easily persuaded by appeals to our emotions. Plus, some groups benefit from us not reasoning well, preferring that we embrace selective facts and selective history; preferring that we succumb to faulty or twisted logic or slogans; preferring that we stay in ideological silos.

Learning to reason well starts with the humility to accept that we don’t have all the answers, with receptivity to new information and new arguments, and with the relentless pursuit of verifiable evidence, historical precedence and data that support the reasoning process.

Being receptive to new information and perspectives means setting aside visceral responses, accepting the possibility that someone we dislike might make a sound argument, or that someone we like might be making a flawed argument. In both cases, we ought to stay focused on what’s being asserted and how this assertion is supported, and be on the lookout for sloganeering, logical errors, selective facts, or the abuse of proportionality.

Being able to recognize erroneous logic is an important first step in learning how to reason better. Planes fly; birds fly; therefore, planes are birds. This is a simplistic example, though you might be surprised at how often similar arguments are proposed with straight faces. Because some fraternities act abusively toward women (planes), many people were inclined to believe the false Rolling Stone story about the University of Virginia fraternity (birds), ignoring the lack of evidentiary support for the accusation.

Another common reasoning mistake is to begin with sound data, but ignore the absence of facts linking this sound data to conclusions. I came across this issue in a Wall Street Journal article that purported to connect frog population decline to global warming. Here was my response:

When science records what it observes, when it measures phenomena, and when it faithfully and accurately models that data, its finding are valid, useful and reliable. But when scientists, however well-informed, offer speculation based on these observations, measurements and models, credibility and reliability are diminished, sometimes drastically. Thus, the observation that the frog population worldwide is declining, corroborated by measurements, in combination with models that purport to demonstrate global warming is not (yet) sufficient to assert the title of your article (“Study Finds Global Warming Is Killing Frogs”). This conclusion is speculative, as it is based on the assumption that warmer temperatures at higher elevations in Costa Rica are responsible for the viability of the fungus that is infecting the frogs.

Proportionality is an important consideration too. Learn to recognize a faulty argument along the following lines: The United States sometimes executes innocent men, Hitler executed innocent men, and therefore, the United States and Nazi Germany are equally bad.

Belief in the Law of Small Numbers,” by psychologists Daniel Kahneman and Amos Tversky, revealed that statistical inferences are often based on sample sizes too small to support conclusions. According to Kahneman, “We pay more attention to the content of the messages than to information about their reliability … a view of the world that is simpler and more coherent than the data justify.” Kahneman also warns, in “Thinking, Fast and Slow,” against focusing on a specific attribute, such as benign climate, and using it to arrive at a broader conclusion. For example, Californians, despite the better weather, reported they weren’t any more satisfied with their lives than Michiganians.

The goal of learning to reason well is not to turn us into emotionless calculating machines. Living well is more than reasoning well. Even so, learning to reason well is an essential skill to help us decide important matters in a way that better corresponds to reality and truth.

April 24, 2015, MichiganVotes Weekly Roll Call

“Early Warning System” for overspending school districts

Now with one click you can approve or disapprove of key votes by your legislators using the VoteSpotter smart phone app. Visit Votespotter.com and download VoteSpotter today!


Senate Bill 233, Revise vehicle trade in tax break detail: Passed 37 to 1 in the Senate

To revise a 2013 law that exempts from sales tax the value of a trade-in when buying a motor vehicle, titled watercraft or recreational vehicle, so that it also applies to purchases made from out of state dealers. Under the 2013 law the tax exemption will supposedly be phased in over 24 years.

Who Voted “Yes” and Who Voted “No”


House Bill 4325, Establish overspending public school “early warning system”: Passed 60 to 49 in the House

To require school districts to submit their annual budget projections and assumptions to the state each July, and require intermediate school districts to declare whether they concur with the projections and assumptions. Non-concurrence would trigger a detailed reporting and oversight process. The intention of this and related bills is to create an “early warning system” for school districts with financial problems.

Who Voted “Yes” and Who Voted “No”


House Bill 4328, Authorize withholding state money from overspending school districts: Passed 58 to 51 in the House

To give the Department of Treasury the authority to withhold state school aid payments from an overspending school district that fails to submit an acceptable “deficit elimination plan,” or that then falls more deeply into financial trouble.

Who Voted “Yes” and Who Voted “No”


House Bill 4329, Authorize emergency manager for chronically overspending school district: Passed 59 to 50 in the House

To authorize appointment of an Emergency Manager for a public school district that fails to comply with an “enhanced deficit elimination plan” required by House Bill 4327 for a district whose regular deficit elimination plan failed to fix the problem.

Who Voted “Yes” and Who Voted “No”


House Bill 4331, Increase municipal and school “emergency loan” funding: Passed 64 to 45 in the House

To increase from $50 million to $100 million the amount allocated through 2018 for “financial emergency” loans from the state to public school districts, and increase from $35 million to $85 million the amount of such loans to local governments.

Who Voted “Yes” and Who Voted “No”


SOURCE: MichiganVotes.org, a free, non-partisan website created by the Mackinac Center for Public Policy, providing concise, non-partisan, plain-English descriptions of every bill and vote in the Michigan House and Senate. Please visit www.MichiganVotes.org.

Film Incentive Supporters Ignore the Facts

No evidence that Michigan's program is worth the cost

Ken Droz, former director of communications for the Michigan Film Office, responded to an op-ed I co-authored about Michigan's film incentive program. Unfortunately, he levels criticisms and makes claims without citing any facts.

The block quotes below are the assertions he makes in a MLive article, and are followed by my response:

I have seen and studied all the data published, including that much-cited Tax Foundation treatise and can tell you it consists mainly of ideology driven rhetoric and cherry picked facts to support pre-existing opinions.

There are many independent studies on film incentive programs; nearly all find negative economic effects. Dr. Robert Tannenwald, a professor at Brandeis University, reviewed the literature in 2010 for the left-leaning Center on Budget and Policy Priorities, finding “not much bang for too many bucks.”

It's true the program does not pay for itself from tax revenue generated. One major point overlooked however, is that like other public assets such as schools, state parks, and transportation — all money losers — the film incentives were not designed as a fiscal tool to create revenue.

Film incentive programs are not “public assets.” They are a transfer of wealth from taxpayers to the film industry.

[Film subsidies] benefit the state in other ways by a) stemming the massive brain drain of our youth, b) diversifying the state's economy, lessening automotive dependency, c) creating jobs, and d) enhancing tourism. And guess what? It was succeeding on every front.

Droz provides no evidence for any of these claims. Altogether, there are only about 1,500 film jobs in Michigan, according to the Bureau of Labor Statistics. Even if all of these jobs were a direct result of the program and all film employees came from other states, it would amount to a drop in the bucket for the state's economy.

[A]s conceived, the rebate percentages would come down — as they have been — as infrastructure developed and a capable indigenous workforce grew, thereby increasing revenue toward neutral status.

This is a leap — government reports consistently show the film incentive programs falling well short of "neutral status."

As I noted recently: “A few years ago, Michigan’s Senate Fiscal Agency found that the program returned only 11 cents per dollar spent to taxpayers. Louisiana spent $198.6 million and got back $27 million in tax revenue according to the state (13.6 cents per dollar spent). The Massachusetts Department of Revenue found that their incentive generated less than 14 cents on the dollar in 2012 (the latest year figures were available).”

The fact is most movies produced with incentive funds are made independently without studio backing, without which would never even get made.

This one is true, and often cited by subsidy proponents. But while there are more smaller films receiving money, the bulk of the spending from the program goes to the big studio projects. In 2014, most of Michigan’s film incentive budget ($35 million) went to Batman v. Superman. In 2013, most of the funding ($40 million) went to Oz: The Great and Powerful.

Michigan taxpayers have spent half a billion ($500,000,000) on a transient industry that takes the money and runs. With a tight budget and the need for more road funding, Michiganders can no longer afford this expensive luxury.

Michigan’s Obamacare Medicaid Expansion Exceeds Projections by 22 Percent

Cost may be much more expensive than originally assumed

The Foundation for Government Accountability has just published a report on state enrollments under the Obamacare Medicaid expansion. Here’s what the authors say about Michigan:

When Republican Governor Rick Snyder lobbied the Michigan legislature to adopt his Obamacare Medicaid expansion plan, he too sold it on the promise of low and predictable enrollment. His office predicted no more than 477,000 able-bodied adults would ever sign up, with 323,000 signing up in the first year.

But more able-bodied adults enrolled in ObamaCare expansion in the first three months than the state thought would sign up during the entire year. Despite the fact that Michigan did not expand Medicaid eligibility until April, nearly 508,000 adults signed up by the end of 2014, far more than the state thought would ever enroll. Enrollment continues to climb, with nearly 582,000 able-bodied adults signing up by April 2015.

Like Michigan, many states accepted the Medicaid expansion because lawmakers were afraid to stand between their local hospital cartels and hundreds of millions of dollars in “free” federal money (statewide more than $3 billion annually for Michigan).

But starting in 2020 Michigan will have to pick up 10 percent of the total cost. The newly compiled figures suggest that this may cost a lot more than members of the House and Senate anticipated when they voted to take the money.

In 2013 the Senate Fiscal Agency, using similar assumptions to those of the Snyder administration, projected that the state would have to come up with $385 million in 2021 to cover its share. Supposedly this would be partially offset by savings realized from offloading some mental health and prisoner health care costs onto the federal budget, but given the actual enrollment figures reported by FGA, those plans may need to be revised.

Policy analyst Jarrett Skorup notes today in Bridge Michigan that the state funding gap between Michigan’s 15 public universities ranges from $2,747 to $11,561 per pupil. Eliminating this gap would save taxpayers more than $600 million. Skorup writes about the arbitrary process by which colleges are funded:

Grand Valley State University scores second-highest on the state’s “performance funding” measurements and Wayne State University scores the lowest. By most objective measures, the former is doing a better job than the latter — but WSU still gets far more money from taxpayers.

Consider that Wayne State (20,108) and Grand Valley (20,825) have nearly the same number of resident full-time students — but the former receives more than three times as much money ($191.1 million compared to $64.4 million).

The six-year graduation rate at GVSU is 66 percent compared to 28 percent at WSU. The average student tuition paid per degree awarded at GVSU is $63,722 while Wayne State takes in over $108,000 in tuition per bachelor’s degree.

When the university the state says is doing the second-best in providing value to students is receiving among the least amount of funding per student, there’s something wrong with the formula.

Read the rest of the piece at Bridge.