It’s a fundamental principle of economics known to every freshman econ major: if you raise the price of something, demand for it will go down. Keep raising the price, and you’ll end up with less money than you started with. A concept so simple, even a child could understand it (see graph).
Yet such simple common sense continues to elude lawmakers, who seem to think they can just keep raising taxes and tap into an unlimited pool of cash.
Statistics released in Kentucky last week once again demonstrate the foolishness of such an approach. Kentucky lawmakers passed a whopping tax hike on alcohol and … tax receipts fell 55%. In fact, in the last year, consumption and wholesales tax revenue dropped by a whopping $1.75 million.
Of course, Kentucky legislators should have been aware of this – just look at the effects of revenue raising alcohol taxes in the past: the last time the federal government raised the distilled spirits excise tax, it took 11 years to bring in more revenue. And look at what happened with tobacco tax hikes. New Jersey raised the cigarette tax 17.5 cents in 2007. They collected $52 million less than they had projected and $22 million below what they collected before the tax hike. Maryland raised the cigarette tax $1, in 2007 sales dropped by 25% and there was a 254% increase in cigarettes illegally crossing state lines. When Arkansas passed a 56-cent tax hike on cigarettes in February, revenue projections were lowered by $14 million just one month after passage.
Hiking taxes hurts consumers and kills jobs – and doesn’t even raise revenue. There’s a good reason why friends don’t let friends hike taxes.