Local Laffer Curve

A recent newspaper item shows the Laffer curve at the local government level. The Laffer curve illustrates the idea that when tax rates go up, revenues might go down if the tax base shrinks enough.

From the Falls Church News-Press:

“With another big hike, 75 cents a pack, in its cigarette tax put into effect last July 1, the City of Falls Church City Council asked for a spot check on the impact from the City’s Chief Financial Officer John Tuohy after the first quarter of the fiscal year, and he reported this Monday that July-September net revenues were down from the previous three years. He attributed the drop to “the national trend of decreased smoking.” Annual revenues peaked at $520,000 in the 2005-6 fiscal year, dropping to $464,000 last year. Packs sold in the July-September time frame dropped from 69,000 in 2004 to 58,000 this year.”

Thus, the number of packs sold is down 16% in one year. The CFO says that the cause is a “national trend.” In fact, government data show that the smoking rate has been pretty flat in recent years.

The CFO is being disingenuous. He must know that local taxpayers are responding to the city’s sharp increases in the cigarette tax rate in recent years.

For cigarette tax background, see here.