Bayou Business Review, 5/18/98 p. 34
What a difference two weeks can make. In my last column (May 4, 1998), I wrote expressing concern about what the state legislature may do in the current fiscal session, what it may do out of naiveté. Little did I know that the day after I turned my column in that someone from the tobacco industry would ask me to report my findings from my 1995 article in National Tax Journal on the effects of state cigarette tax increases before Louisiana’s House Ways and Means Committee. The committee was meeting to hear bills that would raise Louisiana’s cigarette tax from its current tax of 20 cents per pack to anywhere from 60 to 90 cents per pack.
At the Ways and Means Committee I was before John Alario, Mitch Landrieu, Sydnie Durand, David Vitter, Sherman Copelin, William Daniel, Cynthia Willard-Lewis and others. I must tell you that Ways and Means is a collection of sharp, sophisticated individuals. Their questions were good, well-thought questions.
For instance, they asked why my study showed a lower effect of state cigarette taxes on smoking behavior than the study reported by those who were proposing increasing the state’s cigarette tax. (The answer is that my study accounted for people from one state buying cigarettes from states with lower taxes, while other studies have ignored this form of tax evasion).
If the Ways and Means Committee is representative of our House of Representatives, common sense plays a strong role in our legislature (to be sure, special-interest forces are still quite powerful in the end).
On the Senate side, common sense won an important battle. Foster Campbell’s oil and gas processing tax bill was shelved. Instead, it seems that the Louisiana Senate will put forth a bill to establish a study commission that would hire experts to look at the effects of Campbell’s proposal. While unnecessary studies are commissioned quite often, Campbell’s oil and gas processing tax proposal isn’t going away easily. A study may be the only way to get the proponents of this bill to see the light.
With the promise of great revenue that many special interests wish to tap into (teachers, university professors, local governments, sheriffs, etc.), Campbell’s bill has many in the state who want to pass it. The bill also has a strong special interest opposed to it, the oil and gas industry, especially the refinery and pipeline segments of the industry.
Even though there is a good reason to establish such a study commission, some of the research has already been done. First, markets have a way of distributing the burden of any tax among the buyers and sellers. Buyers tend to pay relatively more of a tax, through higher prices, if they have few options. Sellers pay relatively more of a tax, through lower after-tax prices, when sellers have few options. Buyers and sellers usually end up each paying a portion of any tax increase, so not all of a tax is passed on to consumers. Prices go up only a fraction of a tax increase.
In a 1981 National Tax Journal article, Charles McClure of the National Bureau of Economic Research showed that state taxation of an industry is limited in its ability to pass taxes onto buyers. McClure found that the smaller the market share of the taxing state, the smaller the impact of state taxation on out-of-state buyers. Since Louisiana only supplies a fraction of the gasoline and natural gas in the country, we can pass on very little of an oil and gas processing tax onto out-of-state buyers. If the tax is not passed forward to buyers, it is paid by the sellers. In this case, people who work in Louisiana’s oil and gas industries pay the tax by losing their high-paying jobs.
To make matters worse, as Louisiana-produced gasoline and natural gas becomes more expensive than out-of-state competitors, Louisiana loses market share and even a smaller proportion of the tax can be passed forward. After several years, this tax ends up producing little state revenue because there will be no oil and gas processing in Louisiana to tax.
Yes, some of our legislators are very sharp individuals. I am sure that after a study is completed, our legislators will bury this tax proposal along with perpetual-motion machines and the eat-all-the-ice-cream-you-want diets.