Tax Update
My thoughts: Smoke-tax crackdown flouts laws of economics
By Mark Pribonic
Special to Viewpoint
November 25, 2007
A few weeks ago Tennessee Department of Revenue officials announced a crackdown on individuals who commit the high crime of purchasing goods at the lowest possible price. The penalties for this egregious act include confiscation of property and possible fines.
Tennessee state government is displeased with citizen reaction to the 42-cent increase in the tax on a pack of cigarettes that went into effect in July. Apparently some residents have the audacity to buy their smokes across the border now, thus denying the state bureaucracy a portion of its booty.
The ignorance displayed by elected officials when the subject matter requires economic common sense and historical perspective never ceases to amaze me. Tennessee's 62-cent-per-pack cigarette tax is a case in point.
The only real law being broken in the matter of the cigarette tax is the law of economics, which naturally governs the behaviors of free individuals. Ironically, government officials conduct their daily routines as consumers under the same natural laws that they now would deny to other individuals. Under the natural laws of economic behavior, when a consumer is faced with nearly identical choices, then the individual will choose the less costly alternative.
For example, when Piggly Wiggly offers Coca-Cola products at $3.50 per 12-pack, while Target offers the same product for $3, the rational consumer would choose to buy their Cokes at Target.
Price-conscious consumers can make similar choices between doing business in different states.
I reside in the Wisconsin border town of Hudson, where my house is no more than a mile and a half from stores in Minnesota.
The Wisconsin tax on gasoline is one of the highest in the country. By filling several cars a week in Minnesota, our family saves around $600 a year on gasoline purchases -- $600 that can be used to visit our son in college and watch SEC football. Multiplying our family by the tens of thousands who live along the border, the state of Wisconsin loses millions of dollars in state gas tax receipts.
At least for now, Wisconsin -- one of the most tax-oppressive states in the U nion -- is not keeping surveillance on the amount of contraband gasoline I put in my gas tank. Contrast that with Tennessee, where revenue agents have been monitoring tobacco retailers located just across the state line to identify Tennessee residents returning home after buying more than two cartons of cigarettes -- a misdemeanor offense. Since late September, they announced earlier this month, they have seized nearly 1,200 cartons of cigarettes.
Even without understanding the laws of economics, New York City's experiment with the cigarette tax should have forewarned Tennessee legislators of their folly. Several years ago, in an effort to bridge mounting budget deficits, New York City raised its cigarette tax to $3 per pack. Not only did many smokers decide to buy their elements of vice somewhere else, but some people also decided the habit was no longer worth the cost and quit smoking. The financial impact to city coffers was a substantial decrease in revenues as sales of cigarettes in the city fell by 50 percent within four months of the new tax. Far worse than the loss of tax receipts was the resulting violence in New York City as organized crime and others involved in cigarette smuggling defended their turf.
Faced with the realities of natural economic law, the state government of Tennessee has embarked on a course of action little different from that of organized crime, defending its own turf. The surveillance and confiscation of property by the state against those citizens wishing to buy cigarettes from out-of-state vendors who offer cheaper prices is nothing short of government-sponsored extortion. Under what principles of freedom do we allow government to dictate the price and location of a good to be purchased?
Many see this only as an infringement upon smokers, and we all know about the evils of smoking. But why should we believe that the state's interest will stop at cigarettes? Desiring forever more revenue, what is to keep the state from applying the same tactics to gasoline, Coke or potato chips? In the summer of 2000, the citizens of Tennessee revolted against a proposed 5-percent state income tax that would have affected only those earning over $100,000. Opponents of the tax rightfully concluded that the confiscation of wealth, supposedly limited to a fraction of the population, would soon be imposed upon all income earners in Tennessee. The tiny tax would have been the fuel used to ignite bigger government and an array of unforeseen intrusions into individual freedoms.
This is exactly the thought that another group of citizens had on a chilly December night in 1773 when they tossed the King's tea into the waters of the Boston harbor. Whether it is tea or cigarettes, tyranny begins with an innocent tax and an innocuous infringement upon the rights of a few citizens.
Mark Pribonic is an investment banker who lives in Hudson, Wisc. Read
Agents seize nearly 1,200 cartons of cigarettes along state lines" November 6, 2007 By ERIK SCHELZIG Associated Press Writer NASHVILLE, Tenn. Revenue agents have seized nearly 1,200 cartons of cigarettes since launching heightened enforcement along state lines in late September, the department announced Monday. State law limits the number of cigarettes each person can bring in from out of state to two cartons. There are 10 packs in each carton. The increased enforcement comes after the state in July hiked the tax on each pack of cigarettes from 20 cents to 62 cents. Taxes are lower in all eight neighboring states. Missouri and Mississippi have the two lowest taxes in the nation, at 18 and 17 cents, respectively. Revenue Commissioner Reagan Farr announced on Sept. 21 that revenue agents would monitor tobacco retailers just over state lines to spot and seize cigarettes from anyone bringing in more than the two cartons. Agents seized about 900 cartons of cigarettes in October and about 288 cartons after launching the program was launched in September. Department of Revenue officials released seizure information after previously denying an Associated Press records request how many cigarettes had been taken. The department said it will now release the number of cigarette seizures every month. Under state law it's a misdemeanor to possess more than 20 packs _ or two cartons _ of cigarettes that don't bear Tennessee tax stamps. While agents can make arrests and seize vehicles transporting contraband cigarettes, officials have said nobody has yet been charged with a crime or had their car taken. Anybody bringing in more than 25 cartons can be charged with a felony. About 10 revenue officers are involved in the ramped-up cigarette enforcement program. Farr's department has come under criticism for what some consider to be heavy-handed attempts to prevent people from buying cigarettes in neighboring states that have lower cigarette taxes. But Farr in an interview last week turned back complaints about the enforcement program, saying that the effort is also meant to educate taxpayers about how many cigarettes they can legally transport across state lines. On the Net: Revenue's cigarette tax page: Read http://www.wkrn.com/node/127164
Tennessee to step up surveillance of cigarette smugglers
Anyone trying to skirt the state’s puffed up cigarette tax and transport smokes back into Tennessee may want to watch out for the Department of Revenue. The Department’s Special Investigations Section will be conducting surveillance on tobacco retailers located just outside the state lines to watch for Tennesseans purchasing cigarettes in bulk and then transporting them back to Tennessee, revenue announced today. Earlier this year, the state Legislature, at the calling of Gov. Phil Bredesen, more than tripled the state’s cigarette tax from 20 cents to 62 cents per pack. “As a result of this legislation, Tennesseans may travel to neighboring states to purchase cigarettes in order to avoid paying Tennessee cigarette tax,” said Reagan Farr, the commissioner of the Department of Revenue, in a statement. “Tennesseans should know that the law requires cigarettes purchased outside of the state to bear a Tennessee tobacco stamp, otherwise the cigarettes may be considered contraband.” The stepped up surveillance comes as the state’s estimates for cigarette tax revenue has not met expectations. In July, the first month of enforcement, cigarette tax revenues were about $10 million under what the state estimated. In August, the state took in $14 million less than it estimated. The Bredesen administration had estimated the 42-cent tax increase would take in about $230 million annually. Tennessee smokers living near the border are likely tempted to travel to state’s with lesser cigarette taxes. All eight states around Tennessee have cheaper cigarette taxes. Mississippi’s is the lowest at 18-cents all the way up to Arkansas at 59-cents a pack. Kentucky’s tax is 30-cents, according to the Campaign for Tobacco Free Kids. A person possessing two cartons of cigarettes that do not have state revenue stamps is a misdemeanor. The vehicles used transporting the contraband smokes can be seized as well. A person who has more than 25 cartons of cigarettes lacking revenue stamps is a Class E felony. “If revenue agents believe that an individual is transporting more than two cartons of cigarettes into Tennessee, the vehicle carrying the cigarettes will be stopped and searched,” Farr said. “If more than two cartons are found, the cigarettes will be seized and agents have the discretion to make arrests and seize the vehicle.” Read
Lawmakers want to curb smoking spies
Two propose alternatives, changes to surveillance plan
By Tom Humphrey
October 10, 2007
At least two state legislators are suggesting changes to state law in response to the Department of Revenue’s effort to curb the flow of cigarettes into Tennessee from states with lower tobacco taxes.
The department’s “cigarette surveillance program,” launched last month, involves agents stopping motorists who drive into the state with two or more cartons of out-of-state cigarettes.
Under current state law, possession of more than two cartons that bear no Tennessee tax stamp is a misdemeanor, subject to a $500 fine and up to six months in jail. Possession of more than 25 cartons is a felony.
“That’s a big gap,” said Rep. Debra Maggart, R-Hendersonville, who said she may file a bill to raise the two-carton limit to six cartons.
The idea, she said, would be to permit a Tennessean to legally bring cigarettes into the state for personal consumption. Twenty-five cartons would be an indication of plans to resell the cigarettes.
“I don’t think four cartons warrants being pulled over,” she said. “I think that’s reasonable.”
Maggart, whose Sumner County district borders Kentucky, said she plans further research — including discussion with the Department of Revenue — before filing legislation for consideration in the 2008 legislative session, which begins in January.
Rep. Matthew Hill, R-Jonesborough, said he is contemplating legislation that would impose new restrictions on the “very, very broad powers” of Department of Revenue agents.
“One idea might be to say they cannot use surveillance techniques on private Tennessee citizens once they go across state lines,” he said.
The cigarette surveillance program involves an agent watching an out-of-state cigarette retailer for motorists in cars with Tennessee license plates who buy more than two cartons of cigarettes. The agent then calls a colleague inside the Tennessee border who stops the car once it has crossed the state line.
In a news release earlier this week, Hill indicated he might file a bill to raise the two-carton threshold. But in an interview Tuesday, Hill said he will likely leave that to Maggart while developing his own proposal on powers of revenue agents.
Agents carry firearms, have marked cars with blue lights and generally have the same powers as sheriffs’ deputies and city police officers under current state law.
“The efforts by Revenue Commissioner Reagan Farr to accost people by the placing of ‘special smoking’ agents to look over the shoulders of persons buying cigarettes at the market across state lines to see if they are Tennesseans is way out of line with the kind of law enforcement the people of this state expect us to conduct,” said Hill in the news release.
“This is not Nazi Germany where the government is looking at every aspect of our lives. We have much more pressing problems than to be utilizing the resources of this state to conduct surveillance and stop citizens to see how many packs of cigarettes they have,” he said.
Sophie Moery, spokeswoman for the Department of Revenue, said the department policy calls for not commenting on legislation until a specific bill is filed.
“There is nothing for us to review right now,” she said.
Moery said the surveillance program is continuing and appears a success in reducing the flow of low-tax cigarettes into the state. So far, no motorist has been caught with the 25 cartons that would trigger a felony charge, she said.
Cigarettes are seized from those with more than two cartons, but so far agents are issuing only warning tickets and have not placed charges against anyone, Moery said. Monitoring agents find most people abiding by the two-carton limit, she said.
“We are very happy to see people are complying with the law, buying two or fewer cartons,” she said. “We’re not trying to frighten people. Our goal is to have them comply with the law.”
Tom Humphrey may be reached at 615-242-7782. Read
Cigarette surveillance program begins today Sept. 27, 2007 Tom Humphrey NASHVILLE — Starting today, state Department of Revenue agents will begin stopping Tennessee motorists spotted buying large quantities of cigarettes in border states, then charging them with a crime and, in some cases, seizing their cars. Critics say the new “cigarette surveillance program” amounts to the use of “police state” tactics and wrongfully interferes with interstate commerce. But state Revenue Commissioner Reagan Farr says his department is simply doing its job, enforcing a valid state law while protecting Tennessee retailers who properly pay state taxes. Agents have already been watching out-of-state stores that sell cigarettes near the Tennessee border to “get a feel where problem areas are,” Farr said. While declining to be specific, the commissioner said “problem areas” are generally along interstate highways with exits near the Tennessee border. The idea is for the monitoring agent to spot a person buying cigarettes in volume at an out-of-state market, then departing in a vehicle with Tennessee license tags. Starting today, monitoring agents spotting such a suspect will call an arresting agent who will stop the car when it enters Tennessee, he said. The agents will work “in roving teams at random times,” he said. “This shows once again that Reagan Farr and the Department of Revenue are more interested in turning Tennessee into a police state than doing their job of collecting taxes,” said Drew Johnson, president of the Tennessee Center for Policy Research. Farr said the program is partly an “education initiative” to make people aware of tobacco tax provisions in state law and a response to complaints from Tennessee tobacco retailers about “streams of Tennessee license plates crossing the border” from out-of-state retailers. “I don’t think (Johnson) or anyone else wants to see the commissioner of revenue deciding which laws passed by the Tennessee Legislature to enforce and which not to enforce,” Farr said. “If that were the case, they (legislators) could just tell the commissioner ‘get me $11 billion’ wherever you think best.” Tennessee’s cigarette tax went from 20 cents per pack to 62 cents per pack effective July 1. All eight states that border Tennessee have lower tax rates, meaning smokers can save up to 45 cents per pack — $4.50 for a 10-pack carton — by purchasing out of state. The border states with the lowest cigarette taxes are Missouri with 17 cents and Mississippi at 18 cents. The highest is Arkansas with 59 cents. Kentucky and Virginia both tax cigarettes at 30 cents a pack, North Carolina at 35 cents, Georgia at 37 cents and Alabama at 42.5 cents. Under state law, bringing more than two cartons of cigarettes into the state without paying Tennessee taxes is a “Class B” misdemeanor, carrying punishment of up to six months in jail and/or a $500 fine. Bringing 25 or more cartons is a “Class E” felony, with minimum penalty of one year in prison and a maximum of six years plus a fine of up to $3,000. In addition, the specific state statute dealing with untaxed cigarettes provides that vehicles used to transport more than two cartons “are considered contraband and are subject to seizure,” says a Department of Revenue statement. Farr said that agents have been instructed to seize any vehicle carrying more than 25 cartons of cigarettes without Tennessee tax stamps. In cases where three to 24 cartons are involved, he said vehicle seizure is “at the officer’s discretion.” Rep. Stacey Campfield, R-Knoxville, said he sees inconsistency in the enforcement program. “This administration has been very willing to turn a blind eye to illegal aliens pouring into our state, yet, when a natural Tennessean brings a couple of cartons of smokes across the state line, they want to arrest them,” Campfield said. He and Johnson both said the program appears to involve the state in interstate commerce, an area where the federal government is granted sole authority by the U.S. Constitution. Johnson said he hopes an arrested motorist will file a lawsuit against the program, and further predicted the state would lose. Farr said the program does not run afoul of federal restrictions on state interference with interstate commerce. “We’re not regulating the purchase of anything in another state,” he said. “We’re regulating the possession of contraband in Tennessee.” Tom Humphrey may be reached at 615-242-7782. Read
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