State revenue has grown for years
In a statement explaining why he voted against a bill to slightly lower income tax rates over time, Rep. Chris Afendoulis, R-Grand Rapids Township, remarked, “This plan will jeopardize our state’s bond rating and will create a structural deficit in the general fund of over $2 billion by 2022.” However, Michigan’s budget picture is rosier than he suggests: Revenues have grown and are growing. Michigan can afford a modest tax cut.
The small rate reduction voted down in the House would have lowered the rate from 4.25 percent to 4.15 percent starting on Jan. 1, 2018, with further reductions coming later. The reduction would mean that residents keep $195 million more of their income and Lansing would receive $195 million less from this tax. If the tax cuts continued as scheduled, this number would increase to $463 million the year after.
This would require no budget cuts at all since the reductions are smaller than the expected increase in state revenue. The governor’s budget for next year alone proposes spending $777.5 million more than the state does now. The proposed tax cut would only reduce the rate at which the state government increases its budget.
The tax-cut proposal comes after a large increase in tax revenue. Since 2010, Michigan tax and fee revenues increased by $5.8 billion, a 23 percent gain.
Michigan’s fiscal situation is even stronger than those numbers suggest. Lawmakers employed some tricks that depress state revenue. One method is to spend taxpayer dollars in the form of “refundable tax credits.” When some “taxpayers” claim credits that exceed what they owe in taxes, they get a check that comes from other taxpayers. The state considers this spending as something that “lowers revenue,” even though it transfers cash from all taxpayers to politically favored interests.
Likewise, the state can give money to other entities without having to recognize it as spending, further understating the amount it spends. For example, the state earmarks one of its taxes to local governments to reimburse them for cutting property taxes levied on business equipment. Local units will get $321.5 million from the state this year, all of which is not considered state spending.
When it comes time to reduce the burden on regular taxpayers, though, lawmakers do not explore such gimmicks.
And as Lee Chatfield, R-Levering, pointed out, the state’s appropriations process is set up to prioritize spending. The state’s $55.4 billion budget covers a lot of ground, and a modest $195 million tax cut can be a part of that process.
Lawmakers tend to find ways to come up with the money when pressed. Before raising fuel and vehicle registration taxes, they found $400 million in the budget to pay for road repairs. They freed up cash for bailouts of Detroit and the Detroit Public Schools. They found the money when the $1 billion bill for Granholm-era business subsidies came due. Asking lawmakers to come up with a way to spend $195 million less than they would otherwise is a reasonable request.
Michigan’s budget continues to grow. It is disappointing that lawmakers feel like they need to spend all that comes in, and more. That is the message they’ve sent to residents when they voted down the modest decrease in tax rates.
Union named one of five most ‘financially precarious’
The Michigan Education Association, the state’s largest teachers union and second-largest union in the state, is listed by one union watcher as one of the most financially precarious across the nation.
Mike Antonucci, who writes about unions at the one-man Education Intelligence Agency, notes that the MEA is shedding members and facing huge financial liabilities. Antonucci writes this about Michigan’s NEA affiliate:
It isn’t surprising that Michigan Education Association membership was adversely affected when the state enacted a right-to-work law in 2013. But the union’s financial woes predate the law by many years.
MEA lost 6.7 percent of its active members in 2015, but the real problem is its failure to fund obligations to staff pensions and post-retirement health care. MEA’s net assets are an astonishing –$231.2 million. Mounting liabilities and decreasing membership are forcing the affiliate closer to disaster.
The MEA has been bleeding membership for more than a decade – the union has declined from more than 130,000 members in 2005 to 90,000 today. Here are the numbers of paying members over the past decade:
The MEA operates a defined benefit pension plan for its employees. This system is underfunded and has led the union to hike its dues to pay for the system’s liabilities. But it hasn’t been enough. Here are the union’s liabilities by year over the past decade:
2007: $77.6 million
2008: $105.2 million
2009: $191.0 million
2010: $199.1 million
2011: $179.9 million
2012: $224.1 million
2013: $181.5 million
2014: $206.2 million
2015: $304.1 million
2016: $313.4 million
The Michigan Education Association has repeatedly put its money behind one political party and issues supported almost exclusively by political liberals. The union has spent money on controversial ballot proposals – like one allowing local contracts to override state law and another hiking the gas tax. (Both failed by large margins.) In the meantime, the MEA spends very little directly representing members.
Taxpayer spending is up even as student numbers drop
House Republicans have faced some unfair opposition to their plan to lower the state income tax, with assertions that the state budget can’t afford it. Yet the amount of state spending from state-levied taxes has grown $5.8 billion over the past six years.
Budget officials expect that the state’s revenue will keep expanding. There’s more than enough money to let people keep another 0.35 percent of their income — the amount of the latest tax-cut plan — if state spending simply kept steady. Still, it’s important to review what value taxpayers are getting in return for the state’s tremendous budget growth.
A good place to start is by re-examining the additional spending on community colleges. Taxpayers support them through annual appropriations approved by lawmakers. The colleges also receive property tax revenue and charge tuition.
Compare the trends of state universities and community colleges over the decade. They both enroll roughly the same number of students as they did in 2006. They’ve also both raised tuition and fees by roughly 50 percent. But the amounts that they get from the state are drastically different. The state is giving community colleges 50 percent more taxpayer dollars than it used to, but it cut taxpayer dollars going to state universities by 11.7 percent.
We don’t know how community colleges would have reacted to reductions in their state appropriations. But odds are they would have continued to pass their costs on to students.
If community colleges saw the decreases that state universities saw instead of the substantial gains they enjoyed, the state would save $177 million each year. State budgets tend not to change that dramatically, however. Still, legislators should ask a question about community colleges. Why, if they have been favored by the Legislature, have they raised tuition by roughly the same percentage as their less-fortunate colleagues at state universities?
Legislators looking for places to cut would be justified in looking at subsidies to community colleges. The case that giving these institutions taxpayer dollars leads to general benefits to the community is weak. People attend typically a community college to get a specialized skill, training or certification. Doing so benefits them. It also will benefit whoever hires them and perhaps their customers as well. That’s great for everyone involved, but it is just like any other endeavor someone makes to become more valuable. To the extent that it makes sense at all, it makes sense for the people who seek the training to pay for it themselves, and if not them, their employers.
But even if it is important for taxpayers to fund each other’s training, such assistance ought to be provided by funding students instead of institutions.
Community colleges claim that much of the increased funding they’ve received has been eaten up by state-mandated pension costs. They do have a point. All community college employees are, after all, forced to be part of a state-run system where the state sets the benefits, the funding assumptions and contribution rates. Both employees and college administration have little say in the system.
Underfunding in the system increased from $6.1 billion to $26.7 billion in the past decade. The isn’t the result of overly generous benefits but rather continual mismanagement of state liabilities by the Office of Retirement Services and the rest of the state’s administrators.
Educators outside of community colleges have been subject to the same mismanagement. State funding of school districts — which participate in the same retirement system — has increased less than for community colleges, though their enrollment has not declined as much.
Increased taxpayer funding on community colleges has been ineffective in keeping tuition low or boosting enrollment — a point that lawmakers ought to remember. From its fiscal-year 2007 recent low of $248 million, the state is now appropriating $396 million to community colleges. That’s an increase of $148 million, or 60 percent. (The 60 percent figure is higher than the 50 percent mentioned earlier due to differences in data sets covering student enrollment and tuition rates.) Administrators say that this substantial increase did little to help their financial situation.
Yet this ought not stop lawmakers from lowering taxpayer generosity to community colleges. The state keeps putting more in and not getting the financial or enrollment outcomes seen in other state institutions of higher education. Perhaps fewer dollars from taxpayers will encourage them to find ways to better serve students and taxpayers alike.
Missouri Legislature considering idea first presented by Mackinac Center
The first legislative hearing on a labor reform idea first championed by the Mackinac Center will take place tomorrow, and Mackinac’s Director of Labor Policy F. Vincent Vernuccio will be there to testify.
Missouri’s House Committee on Economic Development, chaired by Holly Rehder, R-Sikeston, will consider a bill to bring the nation’s first Worker’s Choice law into being. The bill, introduced by Rep. Steve Helms, R-Springfield, would allow unionized employees to opt out of union contracts and represent themselves before their employers.
The Mackinac Center for Public Policy was the first organization to present the idea, suggesting it to the public and providing model legislation in a 2015 study.
Whether a state is right-to-work or not, employees in a unionized workplace must still accept the union’s representation, even if they are not union members. This forces unions to represent nonmembers and nonmembers to accept the union’s representation. Worker’s Choice is the answer to this free-rider/forced-rider problem. As a flier states:
Worker’s Choice would end the issue of free or forced riders. Worker’s Choice would let workers who opt out of a union in a right-to-work state represent themselves before employers. It would also free unions from having to represent nonpaying workers.
Worker’s Choice gives unionized employees the choice of two options:
- Be a union member and accept the working conditions negotiated by the union;
- Leave union membership behind, negotiate for compensation and working conditions independently, and provide your own representation in grievances and other dealings. That’s what over 87 percent of workers — those without union representation — do already.
And that’s good by workers. According to a 2016 survey, over two-thirds of union members across the U.S. agree with the concept of Worker’s Choice. It would give workers the ability to say “no thanks” to unwanted representation and unions the ability to say “goodbye” to people who don’t pay them.
The bill being considered in Missouri would apply to public sector workers.
Last year in Michigan, Rep. Gary Glenn, R-Midland, introduced House Bill 5829 to enact Worker’s Choice, but that bill has not yet been heard by a committee.
The Missouri hearing is scheduled to begin at 9 a.m. Central Daylight Time on Tuesday, Feb. 28.
Why the Motor City has so few plumbers
Editor’s note: A version of this appeared in the Detroit Free Press on Feb. 23, 2017 as a “letter to the editor.”
In his recent State of the City address, Detroit Mayor Mike Duggan worried about a lack of workers in Detroit and said he wants to launch jobs programs to connect people to work. But there is an easier way for the city to help people find employment: Get out of the way.
In Detroit, dozens of occupations are licensed, which means people must go through extra regulatory steps and pay fees to the city.
Duggan mentioned that at Little Caesars Arena, there are 120 plumbers working, yet only 58 licensed plumbers in the city. That’s because, unlike the vast majority of cities in Michigan, Detroit requires plumbers to go through an annual license and registration process, complete documents for the city for every job they do, and follow a strict and expensive fee chart for every item they fix.
In other cities, someone who wants to work as a plumber must get a state license or work for a master plumbing. Detroit requires an expensive and unnecessary process that raises costs while serving no public benefit. If the city wants more jobs, hacking away at the regulatory structure is the place to start.
Fake news, meet settled science
Editor's Note: A version of this article ran in The Detroit News on February 22, 2017.
Throughout 2015 and 2016, Michigan’s electric utility executives warned us that upcoming closures of coal-fired generation plants meant the state faced impending electricity shortfalls. This is mostly because coal plants are closing as a result of increasingly strict federal environmental regulations, like the Clean Power Plan.
Last year, EPA Administrator Gina McCarthy told Americans that 2016 was “on pace to be the hottest year ever recorded. … The latest climate indicators report confirmed that the impacts of climate change are getting stronger and stronger.” In response, the EPA created the Clean Power Plan to set national standards for reducing carbon dioxide emissions from America’s coal plants.
But a just-released whistleblower report, reminiscent of the 2009 and 2011 “Climategate” scandal, has raised serious questions about the accuracy and transparency of climate change research federal agencies used to justify new greenhouse gas regulations.
Known as the “Pausebuster,” the research in question appeared to show that past measurements had overestimated land and sea temperatures, putting into doubt the two-decade long pause in global temperature increases that climate scientists thought began in 1998. This new research appeared to imply that global temperatures have increased more than previously thought, making climate change an even greater threat.
Thomas Karl, a scientist with the National Oceanic and Atmospheric Administration (NOAA) and lead author of the Pausebuster paper, relied heavily on data described as updated and corrected temperature observations. But these observations were actually criticized by other scientists as unverified.
Even so, Karl published his paper in the journal Science before the Obama administration’s presentation of the Clean Power Plan before a United Nations-sponsored event, the 21st Conference of the Parties meeting, in Paris in December 2015.
Cited widely in the media, Karl’s work played a key role in influencing international decisions to ratify the 2015 Paris Agreement, which called for drastic reductions in worldwide greenhouse gas emissions. EPA greenhouse gas regulations were also influenced by this research, as the agency cited the unverified temperature data in its 2016 Climate Change Indicators report.
Those EPA regulations were a key factor in the decision to close Michigan’s coal plants. At the time, Skiles Boyd, vice president of environmental management and resources at DTE, stated, “there is no piece of control equipment we can put on (existing coal plants) to meet carbon rules under the Clean Power Plan.” Boyle added that by 2030, a single plant in Monroe will be the company’s only coal-fired facility remaining.
Enter Dr. John Bates, a recently retired climate scientist who for the past decade has been responsible for maintaining NOAA’s climate archive. Bates designed the formal review and archiving process used by the agency to preserve historical climate data. His work was recognized by the U.S. Department of Commerce when it gave him its Gold Medal award in 2014 for his innovative work.
In a recent article published in the U.K.-based Daily Mail, Bates described Karl’s Pausebuster research as “the most serious example of a climate scientist not archiving or documenting a critical climate dataset” he had seen. Bates noted that he had objected to Karl’s use of unverified data, but that NOAA senior officials had ignored his concerns.
Bates claimed Karl had refused to follow established data archiving protocols. Karl, he said, “constantly had his thumb on the scale —in the documentation, scientific choices, and release of datasets — in an effort to discredit the notion of a global warming hiatus and to rush to time the publication of the (Pausebuster paper) to influence national and international deliberations on climate policy.”
Nearly two years after Karl’s paper was published, the temperature data he used remains unverified and unapproved for inclusion in the vetted NOAA climate database. In fact, the raw data that Karl used for the Pausebuster paper was never properly archived, and the computer on which it was stored actually suffered a complete failure.
Serious questions have been raised about the validity of research that is foundational to expansive new federal regulations. Furthermore, utility executives stated that the plans to shut down Michigan’s coal power plants were based on those potentially flawed regulations and questionable research.
Recognizing this, Michigan should ask if it is reasonable for utilities to warn of impending energy shortfalls while they rush to replace generation plants that reliably and affordably provided over 35 percent of our electricity in 2016. Science is still showing that a pause in warming over the past two decades has occurred. Perhaps Michigan’s utilities should take this pause into account and pause their plans to close our coal plants until this issue can be fully investigated.
February 24, 2017, MichiganVotes weekly roll call report
House Bill 4001, Cut state income tax rate by 0.2 percent: Failed 52 to 55 in the House
To cut the state income tax rate from the current 4.25 percent to 4.05 percent over two years. The tax could go down another .15 percent later but only if the state rainy day fund is allowed to exceed $1 billion. Twelve Republicans voted 'no' and one Democrat voted 'yes.'
Senate Bill 111, Transfer state revenue to big developers: Passed 27 to 6 in the Senate
To give a number of developers and business owners selected by state and local political appointees up to $1.8 billion state tax dollars over 20 years. The beneficiaries would be allowed to keep the state income tax payments they withhold from employee pay checks. The cost estimate comes from the Senate Fiscal Agency and applies to Senate Bills 111 to 115 together.
Senate Bill 113, Let some big developers keep sales tax they collect: Passed 28 to 6 in the Senate
To allow certain developers and business owners selected by state and local political appointees to keep the sales tax they collect on retail sales. This would be a new way of giving cash subsidies to certain developers, and would reduce state revenue available for other purposes. This is part of the same proposal as Senate Bill 111 above.
Senate Bill 97, Authorize facility development deals between governments and private businesses: Passed 32 to 4 in the Senate
To give state and local government agencies the power to enter joint operating arrangements with a particular developer to build a hospital or transportation facilities. The private operator would benefit from tax exemptions and its governmental partner's power to impose property taxes, borrow, take private property using eminent domain and more. The government agency involved could choose the private sector actor without necessarily having to accept the lowest bid. The projects could be proposals from a private developer.
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 http://www.MichiganVotes.org.
Wisconsin study highlights benefits of performance pay
Over seven years ago, Michigan passed a law calling for teachers to be paid based on performance. The law has been largely ignored, despite evidence that the old compensation system doesn’t work.
The traditional way of paying teachers according to seniority and academic credentials does not benefit student learning. Research has shown that having a teacher with a master’s degree offers a student no advantages. A Brookings Institution report calls it “one of the most consistent findings in education research.” Yet in Michigan, hundreds of millions of dollars go to funding these “master’s bumps” rather than recognizing teachers for merit.
Resistance to reforming educator compensation comes from many places. The more teachers are judged and rewarded as individuals, the less clout labor unions have in representing teachers as groups. Overhauling the compensation system also entails major changes to school’s HR departments. School officials accustomed to operating in the compliance mode have no natural inclination to do otherwise.
The political will needed to overcome the challenges is weakened by the mixed research on merit pay reforms in the U.S. Ineffective teacher incentive programs in Nashville and New York City garnered splashy headlines about how merit pay doesn’t work either. Positive results from Little Rock and Washington, D.C. tell a more nuanced story. And a forward-thinking Colorado Springs school district program has given evidence of success, but it demands more rigorous study.
A 2009 Michigan law requires local public schools to recognize “job performance and job accomplishments as a significant factor in determining compensation.” Student academic growth data, according to the law, has to be a factor. Yet seven years after the law took effect, nearly all of the state’s 20 largest school districts have no real merit pay policy. Some districts do have a policy, but they give nominal bonuses of $50 or $75 to every teacher who clears a low bar in the evaluation process.
Merit pay doesn’t have to be about simply rewarding teachers for test scores, as some opponents have argued. Detroit Public Schools provides a $5,000 incentive to teachers with strong evaluations and low absence rates. Kalamazoo offers extra pay for teachers who earn a certificate from the National Board for Professional Teaching Standards or opt to work in high-poverty, low-performing schools.
The relatively simple and modest departures of Detroit and Kalamazoo show the way for the districts that have opted to disregard the law. The Legislature should consider adding its own incentive to ensure districts at least attempt to follow state policy.
New evidence from a neighboring state strengthens the case for Michigan to step up and change the teacher pay paradigm. Stanford University economist Barbara Biasi studied what happened in Wisconsin after its major 2011 labor reforms. The law allowed districts to negotiate performance-based compensation with individual teachers. She tested what happens when these districts compete for teachers with districts that stuck to the old salary schedule.
Biasi found the quality of the teaching workforce in the reform-minded districts improved. She attributed at least some of the improvement to top-notch teachers migrating to employers that let them negotiate better individual salaries, and to lower-quality teachers leaving the profession. The combined result was a boon to students’ math and reading scores.
Biasi’s analysis further suggests that if all Wisconsin school districts adopted the merit-based approach, there would be a smaller but more widespread benefit. More ineffective instructors would leave classrooms, and better teachers take their place.
Wisconsin’s example shows that giving school districts freedom to negotiate rewards for excellent teachers can make a real impact on student learning. Michigan’s drop-to-the-bottom decline in academic achievement should make the state especially attuned to our neighbor’s compelling example.
But recent history shows us that many Michigan districts will need some serious encouragement before they improve teacher quality through smarter pay systems.
Why ending Florida’s 'Pure Michigan' counterpart would benefit residents and visitors
One state may be getting wise to the fact that government-funded tourism promotion is a bad bet for taxpayers and do away with two state agencies tasked with economic development and tourism promotion.
Recently, Florida House’s Careers and Competition subcommittee voted in favor of a bill that would end Visit Florida and Enterprise Florida. Those government entities are similar to the Pure Michigan advertising campaign and the Michigan Economic Development Corporation, respectively.
Mackinac Center for Public Policy’s Michael LaFaive, who co-authored a study last year examining the efficacy of state-funded tourism promotion, told the Naples Daily News that Florida doesn’t need to spend some $76 million in tax dollars to get people coming to the Sunshine State.
“Well, look at it this way. People were coming to Florida before it started its tourism program, and they’ll continue coming after it’s gone. You have warm weather, beaches and the mouse (Walt Disney World),” LaFaive said. “Our study found that instead of pouring all of that money into promotion, they could use that money to make it cheaper for residents and visitors to travel around the state.”
But what about states, like Michigan, that don’t have the appeal of year-round warm weather or an internationally known theme park to draw visitors?
It turns out, taxpayer-funded tourism promotions – like Pure Michigan – are a waste of money there, too. LaFaive and co-author Michael Hicks, director of the Center for Business and Economic Research at Ball State University, examined data from 48 states gathered over a 39-year period and found that such expenditures are a net loss to taxpayers.
In an op-ed for the Tampa Bay Times, LaFaive and Hicks explained their findings:
We found that when a state spent $1 million in taxpayer funds to promote itself, its accommodations industry saw its economic activity go up by $20,000. That's no typo. It's not $200,000 or $2 million, nor does it refer to the total taxes that flow to state treasuries as a result of the promotional efforts. We also found that such work does not translate into higher incomes for industry employees. When you compare the outlay with the increase in economic activity, it's clear that state subsidies for tourism promotion produce huge negative returns on investment.
The Mackinac study examines the impact of state-funded tourism promotion on the three industries most likely to benefit: hotels and accommodations, amusement and recreation, and arts and entertainment.
“We chose the three industries we did because they are the most likely to be affected by tourism promotion,” LaFaive and Hicks explained. “If an impact can’t be found in the most directly affected industries, the ripple effects elsewhere are unlikely to matter much.”
In both Florida and Michigan, tourism officials claim a much higher return on investment, but neither are transparent with their research so those claims cannot be verified, WFLA-TV News 8 explained. They refuse to disclose the methodology used to determine return on investment, despite being funded by taxpayers.
In Michigan, taxpayers have spent over $261 million on tourism promotion over the past decade; this year, the state could spend $34 million on Pure Michigan and other tourism promotion. In an interview with The Ron Jolly Show, LaFaive discussed how state-funded tourism promotion campaigns are examples of cronyism and corporate welfare.
“It’s so ineffective you could spend the money instead on the new infrastructure investments the governor wants to make and get a higher return on investment for all taxpayers, rather than this attempt to do it for a favored few and have it not be effective,” he said. “It’s not only ineffective but fundamentally unfair because you’re making someone else pay full freight for what appears to be a benefit for your industry.”
An Analysis of State-Funded Tourism Promotion
Naples Daily News: State Tourism Contracts Went to Former Chief of Visit Florida and ‘Emeril’ Cooking Show
Tampa Bay Times: Column: Visit Florida Not Critical to State’s Economy or Tourism
Studies of State-Funded Tourism Promotion Withstand Criticism
WFLA-TV News 8: You Paid For It: New Study Concludes Tourism Spending a Loser For Taxpayers
Ron Jolly Interviews Michael LaFaive About Pure Michigan
An update through 2015
Editor's Note: This piece was originally published by The Hill on February 22, 2017.
People change their behavior based on incentives and higher taxes create a strong motivation to find ways to avoid paying them. Just look at cigarettes.
While the goal of many who wish to raise taxes on cigarettes is noble — improving public health — new research confirms what decades of previous studies have shown: much of the decline in legal paid sales of cigarettes is due not to people kicking the habit, but to an increase in smuggling.
Since 2008 the Mackinac Center has published estimates — now jointly with the Tax Foundation — about the degree to which cigarettes are smuggled into and out of states. High excise taxes are a key variable in our statistical analysis. The lure of saving or making a buck in the acquisition of cheaper cigarettes is strong and encourages every type of mischief.
The statistical model we use for all of our estimates compares legal paid sales by state and smoking rates by state. The difference between the two must be explained, and we believe it is a function of smuggling.
In 2015, New York State had the highest inbound smuggling rate at 57 percent. In other words, more than half of all the cigarettes consumed there were not properly taxed. Directly following New York is Arizona, Washington state (up from fourth place last year) New Mexico and Minnesota.
Many other states found themselves exporting cigarettes to their higher taxed neighbors. New Hampshire was the top export state, with 72 percent of the cigarettes sold there eventually wound up smuggled into other states. New Hampshire was followed by Idaho, Virginia, Delaware and West Virginia.
Our analysis attempts to estimate the primary source of illicit traffic in two categories: casual and commercial. Casual smuggling typically involves small purchases made by individuals for personal use and would include buying cigarettes in one state and smoking them in another or buying small amounts on the Internet. Commercial smuggling is notable for its organized, large and long-haul shipments, such as moving van loads of cigarettes from North Carolina to Michigan for resale, for example. North Carolina, Missouri, Virginia, Georgia and Louisiana appear to be leading commercial smuggling exporters.
The states with the highest amount of casual smuggling were New York (more than 25 percent of the total consumed), Washington, Minnesota, Montana and Michigan. Casual smuggling depends a great deal on border county populations, as well as tax differences between nearby states and the presence of Indian reservations — which often get special tax treatment. Top outbound, casual smuggling states are New Hampshire, Delaware, Vermont, Idaho, and Indiana.
Our research suggests that if tax hikes are adopted in Indiana and Ohio, for example, it will be a huge boon to Michigan retailers and its state treasury. Currently, both Indiana and Ohio have lower cigarette taxes than Michigan, with Hoosiers paying 50 percent less in taxes for smokes than Michiganders. Hiking taxes by $1.00 and 65 cents per pack, respectively, will reverse the flow of casual smuggling across borders. Michigan retailers will see an influx of Buckeyes and Hoosiers buying smokes and more Wolverines will bite the at-home tax bullet and buy locally or, ideally, kick the habit.
That’s not just a theoretical observation. For our 2008 study cigarette smuggling study we obtained private cigarette wholesaler data for sales to Michigan retailers that bordered Indiana. We measured a 50 percent increase in sales in the months leading up to and after an excise tax hike in Indiana. Why such a leap? Retailers knew crossing into the Hoosier state to buy smokes would get more expensive with a tax hike and local smokers would no longer make the drive.
In the last two months serious proposals to hike cigarette excise taxes have been floated in Indiana, Ohio, Nebraska and Delaware. Smokers may be an easy tax target because many view them as sinners and thus easier to tax. But tax-hike proponents must consider the unintended consequences that undermine whatever good intentions they may have had in the first place.