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USD Economists Say LRC Tobacco Tax Math Off, Disagree on Potential Revenue

G. Mark Mickelson sponsored Initiated Measure 25, the buck-a-pack tobacco tax hike, with the promise of putting up to $20 million a year into vo-tech tuition relief. In its fiscal note released last month and included in the 2018 Ballot Question Pamphlet (one of the most fun and useful documents our Secretary of State publishes), the Legislative Research Council says tobacco users will volunteer to pay $24,942,542 a year in IM 25 tax. The unreliable big-money political-machine opponents of IM 25, as well as both the Republican and Democratic parties, claim IM 25 will raise $35 million in new revenue.

Now the GOP spin blog is trying to attack IM 25 for its business cronies from the other direction, citing USD economics instructor Travis Letellier’s conclusion that LRC’s math is off:

“Their assumptions will probably not bring in anywhere near $20 million because they are assuming people will not change their behavior by raising taxes,” Letellier said. “They are assuming they will still be getting all this revenue, the same amount of revenue that they got the last time they raised the taxes on cigarettes.”

Letellier said his concern with this assumption is that elasticity changes over time and tobacco taxes haven’t been raised in South Dakota since 2007.

“There is a different pool of people now and you are changing their tax rate again. I don’t think you can assume that this group of people will have the same reaction as the last group of people did,” Letellier said [Lexi Kerzman, “USD Economics Professor Discovers Error in South Dakota Tobacco Measure,” USD Volante, 2018.09.18].

GOP spin blogger Pat Powers amplifies Letellier’s concern by headlining that IM 25 “…Won’t Bring in Anticipated Revenue.” Powers thus seems to be contradicting the claim of his biz-party cronies who are screaming that IM 25 taxes people too much and making it sound like House-exiting Mickelson is taxing people too little.

But in his haste to throw the latest handy mud at Mickelson’s tax hike, Powers ignores the remarkable assessment of Letellier’s boss, USD dean of economics Mike Allgrunn, who says LRC’s economists are usually pretty sharp, and that this time, even when they’ve screwed up, their screw-ups still add up to a pretty good answer:

Allgrunn said he believes there is either an error in the explanation or the numbers. He said he predicts the numbers the government projected will not be that far off.

“They made enough mistakes in their math, that by the end they were right,” Allgrunn said. “It bothers me that they are doing economics in public and it’s incorrect. Bless their heart, they are trying to do the right thing and I applaud that. But it does appear to me that there is an error.”

Allgrunn said South Dakota is one of the top states of predicting tax revenue and that mistakes like this one are uncommon.

“South Dakota to be fair I think a really good job to estimate those taxes, not perfect because nobody is,” Allgrunn said. “South Dakota generally tries to do a really good job at predicting the revenue, sometimes they error a little bit, usually on the conservative side” [Kerzman, 2018.09.18].

Powers’s choice to headline the conclusion of a visiting instructor and ignore the somewhat different conclusion of USD’s economics chair epitomizes the cherry-picking nature of Trumpist Republicans’ approach to serious scholarship. This disagreement also shows another problem with the strange statutory limitation of LRC fiscal notes on ballot measures to 50 words or less: if LRC had been able to publish its full economic assumptions and analysis, economists and other curious citizens could better track and challenge LRC’s calculations.

But the main headline from Vermillion appears to be this: two economists from USD see errors in the IM 25 fiscal note, but while the instructor says the IM 25 tax hike will fall short of $25 million, the econ chair says $25 million is pretty close. We await the analysis showing the opponents’ claim of $35 million.

12 Comments

  1. Donald Pay 2018-09-20 11:10

    Cigarettes are an addictive product. It is hard to quit, and many people relapse several times before finally giving it up. So, while there is elasticity, it is a brittle kind of elasticity. People may try to cut down, and be successful, and some will quit.

    The added cost may make some people less likely to take up the habit in the first place, but mostly recruitment of new smokers occurs through peer pressure or advertising at a young age, which is less likely to be influenced by cost factors.

    Whatever the case, the tax is aimed at lower income individuals, who have higher rates of smoking. Republicans can’t have the wealthy paying their fair share, you know.

  2. Porter Lansing 2018-09-20 11:29

    KIDS GONNA VAPE …
    – In 2017, 8 percent of high school students reported vaping nicotine at least once in the past 30 days. Many adolescents use more than one tobacco product.
    – Manufacturers don’t have to report e-cig ingredients, so users don’t know what’s actually in them.
    – 7 in 10 teens are exposed to e-cig ads.
    – Past-month use of cigarettes was 3.6 percent among 8th graders, 6.3 percent among 10th graders, and 11.4 percent among 12th graders. Past-month use of e-cigarettes was 9.5 percent among 8th graders, 14.0 percent among 10th graders, and 16.2 percent among 12 graders.
    https://www.drugabuse.gov/related-topics/trends-statistics/infographics/teens-e-cigarettes

  3. Robin Pearce 2018-09-20 12:44

    Are the resulting impacts from a uptake in SNAP enrollment factored in ? Yeah people who qualify for SNAP but don’t enroll due to stigmatizism will enroll when higher taxes threaten their food security. It’s a real thing. Here’s the numbers :
    https://www.lawschool.cornell.edu/SELS/upload/CELS_KyleRozema.pdf

  4. Patricia 2018-09-20 19:30

    Predicting accurate numbers in this situation is playing roulette with tax payer dollars. Some may quit, some may switch to vapping and still more will cross over the borders to neighboring states to make tobacco purchases. I know……Let’s increase the beer tax! That’s a topic that will make folks shiver with fear!

  5. OldSarg 2018-09-20 21:13

    I would rather smell vapor than cigs any day. Leave them alone. The government needs to butt out.

  6. Hugh Grogan 2018-09-20 21:36

    This is a tax directed at the poor. It’s a tax that very few middle or higher income people will pay. If the tech schools need money, than a tax should be implemented that we all pay. The only reason I could support another tax on cigarettes is to fund Medicaid expansion. That would make sense because of the impact of smoking on health. We already have one of the most regressive tax systems in the country. It’s time that we establish a more equitable system where the burden is not the greatest on those least able to pay.

  7. Ryan 2018-09-20 22:17

    Wildly taxing an individual or semi-unique product like tobacco is bull—- bully politics at its worst. It’s not-even-a-little-subtle bullying of a class of people that nobody wants to defend. I’m not a tobacco user and I still think it’s crap.

  8. grudznick 2018-09-21 22:17

    Most people are not surprised that the Council of Legislative Research engages in French Math. Why are you? Most of the legislatures are very skeptical of the advice that LRC fellows give forth. They are widely mocked, and laughed at.

  9. Cory Allen Heidelberger Post author | 2018-09-22 08:43

    Um, Grudz? That’s the opposite of the assessment offered by Dean Allgrunn. Why isn’t the expert in economics laughing?

  10. Debbo 2018-09-22 21:56

    Raising taxes on harmful products has historically reduced the use of those products. For that reason, I support it.

    Vaping liquids have been analyzed and some have higher levels of nicotine than cigarettes. All ingredients should be listed on the container or box, just as it is with other items we consume. When the maker hides the ingredients, they create suspicions. There’s only one way to put such suspicions to rest–reveal the ingredients.

  11. Curtis Price 2018-09-23 21:14

    Mr Grogan hit this right on… this is another tax on the people that are already paying so much to subsidize the lifestyle of the top 10% of South Dakota. I am voting no on IM 25.

    Pour me another red beer. Thanks.

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