Today we have an example of economics 101: consumption taxes usually don’t work. In case anyone has forgotten the failure of the luxury tax in the 90s, we can learn the same lesson by examining the loss of gasoline tax revenues as prices soared earlier this year.
The loss of such revenues will have Democrats throwing a fit since these revenues are needed for infrastructure projects. This is why relying on the revenues of such consumption taxes is a bad idea, just like the proposal to fund an SCHIP expansion with an increased tobacco tax was and still is.
In California, where the state budget is out of control, legislators seem to be missing this lesson. Governor Schwarzenegger is reportedly open to a list of new taxes, including an increase on vehicle registration fees. When I moved here, I was stunned by how high the fees already were, and apparently they’re not high enough. In a down economy, it’s not a good idea to increase taxes and fees that could influence people to spend less.
The lesson is a simple one. Democrats seem to think they can tax consumers on anything and expect the consumer habits to remain the same so that tax revenues increase. Time and again we’ve seen that things don’t work out that way.
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