Tax More, Get Less -- the PA Lesson

One year ago, there were about 400 shops in the Commonwealth of Pennsylvania that were opened to sell electronic cigarettes and tobacco-free alternative devices.  These shops, called "vape shops", are common throughout the country, as addicted smokers switch over to devices that use a non-tobacco substance to deliver nicotine for their level of addiction, one which eliminates most of the cancer-causing components of tobacco and produces only water vapor in place of smoke.

A year ago, there were 400 such shops there, nearly all small storefront businesses created by younger entrepreneurs as little retail business from which they could make a living.  Today Pennsylvania has only 300 such businesses, and the industry estimates that will be cut in half in the next year.

That's because the other thing that happened a year ago is the imposition by the Pennsylvania legislature of a 40% wholesale tax on vape retailers acquiring the products that they sell in their shops.  As anyone who's ever been in retail knows, the margins are not very good, and the competition from online sellers of the products -- any products, not just vaping hardware -- is strong.

Customers will settle into the least expensive source of their products that serves their minimum needs and desires.  So when Pennsylvania imposes a punitive tax on retailers, they end up having to raise their prices to customers -- it's not like they can cut their already-tiny margins to absorb a 40% increase in their costs.

And "raised pricing to the customer base" means only two things -- the customer will stop buying the product, or they will buy it elsewhere.  "Elsewhere", of course, means either online or in a neighboring state.  Either way, because the sales are taken from the retailer in Pennsylvania, the retailer loses business ... and closes the shop.

The first 100 shops have now closed, and another 150 are on their way, according to the article.  Ironically, Pennsylvania had raised cigarette taxes to cut smoking rates.  Among the best ways to cut tobacco-use rates, of course, is to use alternative nicotine devices, from patches and pills -- to vaping.  Why is Pennsylvania's expectation for over-taxing vaping supposed to be any different from the intended result of over-taxing (properly, in my view) cigarettes?

Let me say that again.  If you raise the tax on any transaction, you will get less of that activity.  If you lower the tax, you will get more of it.  Their legislature passed a tax on cigarettes (an additional dollar per pack in 2016) to lower the rate of use, and did it successfully.  Then they pass a huge wholesale tax on vaping products, ostensibly to raise revenues -- why did they not think that they would be putting small businesses out of business and losing revenue?  Why did they not realize that they were going to raise the cost of one of the most effective smoking-cessation products as well?

Yes, government can be a jerk.  It can be (A) stupid, it can be (B) excessively political, and it can be (C) corrupt.  In this case, it was all of the above.

And those clowns will get re-elected anyway.

Copyright 2017 by Robert Sutton
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