'Sinful and Tyrannical' By David R.

Henderson
14 October 2006 The Wall Street Journal

A 19th-century American judge, Gideon J. Tucker, once famously observed that "No man's life, liberty or
property is safe while the legislature is in session." He was an optimist: Four major tax increases will appear
on the November ballot in California while the legislature is out of session.

Proposition 86 seeks a $2.60 per-pack levy on cigarettes, on top of an already-high 87 cents per pack.
Proposition 87 would tax every barrel of oil pumped from an in-state well. Proposition 88 would impose a
$50 tax on every parcel of land. And Proposition 89 would impose an additional two-tenths of a percentage
point increase in the current tax on California corporations.

All four of these ugly measures would have negative consequences, and not just for their targeted victims.
Consider Proposition 86. Forget about the rights of smokers: The additional tax would also hurt the state
budget, because the revenues are earmarked for various special interests in health care, and would fund
health insurance for people under age 19 (including illegal immigrants). But a tax increase that large will
reduce the number of taxed cigarette packs purchased, reducing the revenue collected from the current
cigarette tax, which goes to the state budget.

The new tax would discourage sales of taxed cigarettes first because it will cause people to cut back on the
amount they smoke. Economists have found that for every 10% increase in the price of cigarettes, the
number of cigarettes purchased falls by about 5% to 6%. A $2.60 tax increase would increase prices by
about 66%, which would then cause a 33% to 40% decrease in sales -- at least in-state sales. Second,
many people instead will purchase cigarettes from no-tax Indian reservations, or even smuggle them in.
There's lots of evidence to back this up, including a famous episode in the early 1990s in Canada. A high tax
on the national level caused so much smuggling that tax revenues collected actually fell. (Disclosure: From
2003 to 2004 I consulted for a tobacco company that was being unjustly sued.)

Proposition 87 is a percentage tax on the price of oil pumped from California wells. Between $10 and $25 a
barrel, the tax would be 1.5% of the price. The tax rate would be 3% if the price per barrel is between
$25.01 and $40; 4.5% between $40.01 to $60; and 6% if the price per barrel is $60.01 and above. The
proposition's language is so sloppy that it does not specify whether a single tax rate would be applied to the
whole price, or whether separate marginal rates kick in at each price point.

Because the price of oil, a commodity, is determined by world supply and demand, the tax would have no
special effect on prices of California crude. Could it make the price of oil higher than otherwise? Only if it
reduced world supply; but given the small size of the tax and the fact that California production is now less
than 1% of world supply, the effect on the world price would be very small.

But just to make sure, the proposition would fund investigations of oil companies that try to "pass on" the
tax increase in the price. Severin Borenstein, director of University of California Energy Institute at UC
Berkeley, points out that this would lead to "constant investigation that will yield no more than what past
investigations (on why gasoline prices spike) have yielded, or even less."

The oil tax revenues would go to fund "alternative energy." That approach didn't work for former President
Carter, is not working for President Bush, and won't work in California. Government funding, by definition, is
not subject to a market test. "Alternate energy" will make sense only when its cost is less than the cost of
using oil. The market will handle this problem as it did over a century ago by replacing the depleting whale-
oil supply with petroleum. Amazingly, over $40 million of the $45.6 million contributed to the campaign for
the tax comes from one man, Hollywood big shot Stephen Bing.

How about the Proposition 88's new $50-per-parcel tax on California landowners, revenues going to public
schools? The overall revenue from this tax -- $450 million a year -- seems small but, as the Los Angeles
Times pointed out in an editorial opposing the measure, the new tax would set an "uncomfortable
precedent." It would put the state government, for the first time, in the position of imposing and collecting
property taxes. If Proposition 88 passes, count on the state government increasing the tax later.

Of all the four taxes, Proposition 89 may be the biggest assault on liberty. It would increase the tax rate
corporations and financial institutions by 0.2 percentage points, not the trivial 0.2 percent that Attorney
General Bill Lockyer wrongly claims in the official ballot language. The approximately $200 million raised
would go to politicians running for office who raise a mere $5 each -- yes, you read that right -- from a large
number of people. Someone running for governor, for example, would need to get at least 25,000 such
contributions (a piddling $125,000), and, in return, he would receive a whopping $10 million of Proposition
89 tax revenues to run in a primary election and $15 million to run in a general election.

A government-funded politician running against a privately funded politician would get to spend even more
than the limit if the privately funded politician spent over the limit. So, for example, if a candidate for
governor spent $25 million of non-tax money on his campaign, his government-funded opponent would get
$25 million from the government. In this way, the wishes of those who actually gave their own money for
the campaign -- those high rollers who, say, gave a whopping $100 rather than $5 -- would be negated.

Those who pay the taxes would have no choice about whom the government supports. But as Thomas
Jefferson observed, "to compel a man to furnish contributions of money for the propagation of opinions
which he disbelieves and abhors, is sinful and tyrannical." By that standard, Proposition 89 is sinful and
tyrannical.

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Mr. Henderson is a research fellow at Stanford University's Hoover Institution and the co-author of "Making
Great Decisions in Business and Life" (Chicago Park Press, 2006).