We libertarian types (though not Libertarians with a capital L)* tend to talk often of unintended consequences, but we usually have to hedge our bets and say things such as "we can't really show you the work that was not done" or "who knows what inventions never came about". However, in a few rare cases, we actually can point out the unintended consequences of a government act, and in a few of them, the damage done is so appalling that even those who don't have libertarian leanings still have to sit up and listen.

One perfect example is Maryland's cigarette tax.

I am sure many are now scratching their heads and asking what horrors a cigarette tax could unleash. Is this perhaps some militant smoker screed? But no, there really is something horrifying at the end of all this, so please stick with me.

Back in the days before the unified settlement plundered the cigarette companies and split the spoils between several states, the state of Maryland decided to join New York, Canada and the other high tax states in taking a cut of the tobacco industry for themselves. It was a smart move. Non-smokers have little sympathy for smokers. The story that smokers use more public health money, no matter how untrue, has circulated for long enough that the state can rely on arguments about medical costs to justify any abusive practice. And anyway, they could claim the high taxes were to "discourage smoking" and even that ultimate argument stopper, "for the children" And best of all, despite all the rhetoric about stopping smoking, the government  knew smokers were largely indifferent to price increases, so they would continue to smoke, and pay taxes, regardless of the tax rates.

What makes the whole thing particularly offensive for those of us who care about honesty is that the government openly lied in their campaign to win the new taxes. Well, not the government, a private non-profit group that pushed the tax, but since they were pushing for a new tax, I tend to suspect they were a little less independent than they claimed. Regardless, whoever sponsored the advertisements, they were incredibly deceitful. Responding to claims by the opposition that taxes would create smuggling as they had in New York, the sponsors of the new tax claimed that it was just absurd to think that taxes would cause smuggling.

Surprise! Come the new taxes, we saw our state comptroller holding a press conference, bragging about the millions of dollars in smuggled cigarettes he had seized. Despite all the claims, the new high taxes had, as predicted, caused smuggling. And quite a bit fo it as well. As the taxes were very high relative to neighboring states, the incentive was huge. Even private citizens had enough economic incentive to drive to neighboring states, which led the state to legally define "smuggling" as transporting more than 2 packs of cigarettes, making almost every citizen of Maryland a smuggler at one time or another.

But that is not the horror. That is coming next.

You see, our comptroller didn't just brag about all the smugglers he caught, he also bragged about WHO he caught. Thanks to the high profit those high taxes allowed, the smuggling option attracted not just the usual rogues gallery of mobsters and independent thieves, Maryland smuggling was lucrative enough it was being used to fund terrorism. That's right, those guns being shot at our soldiers in Afghanistan and Iraq, some of them were funded by high taxes in Maryland.

And that is the truly disgusting aspect of all this. The state of Maryland is so hungry for cash that they don't even care that they are sponsoring killers. The reasonable reaction to finding terrorists were smuggling would be to reconsider the environment which made that possible, but the state was not about to give up a source of revenue. They had already passed laws turning most smokers into criminals, so they weren't exactly shy about abusing people for money. Nor were they really interested in stopping smoking. It was all about money. They weren't trying to stop smoking, they needed smokers to pay for all their social programs. What they wanted to stop was people smoking cigarettes they had not taxed.

I know many people will think me mad for suggesting the state should have stopped high taxes once hey discovered terrorists were using them for funding, but think about it. Smuggling is only possible if the state treats goods in a discriminatory way, banning them or assessing high taxes. If the state treats goods indifferently, there is no smuggling. If the state honestly taxes their citizens directly, rather than trying to hide their taxes by attaching them to goods, there would be no smuggling, and thus no opportunity for criminals to make money by defying the state. Would there have been mobsters without prohibition? Without a special cigarette tax, would terrorists have been bringing cigarettes into Maryland?

Yes, it sounds insane, but only because we are so used to the state deceptively attaching taxes to goods. But the state's efforts to conceal taxes is the sole reason that smuggling exists. It is the perfect example of an unintended consequence. The state, which does not want people to know how much money it takes, places special taxes on goods, hoping citizens will either think those being taxed "deserve it" because they are using a good some people shun for one reason or another (liquor, cigarettes, "luxuries", etc.) or else just won't notice, but, as a consequence, they create a whole new category of crime and end up funding people such as the mafia or terrorists. Were they simply honest about the amount of money they demanded, they would never have these problems.

And that is what is troubling. The state could solve all of these problems, eliminate all of this crime, with a simple bit of honesty. Yet those reading me, even now, probably think I am insane for suggesting the state tax honestly rather than hiding taxes in goods. How well we have been brainwashed by the big government advocates. We can't even conceive of the state taxing us honestly, and view those suggesting it as either naive or mad**.

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* As I explained elsewhere I think federalism is better than a top-down imposed libertarianism. Ordering people to be free just doesn't work. I also think the Libertarian party is a bit frightening because it has turned a desire for small government into a fear of government that verges on (or dives right into) outright paranoia. They adopt such tinfoil hat ideas as freeing Mumia and Pelletier, accusing cops of being fascists and denying us the right to defend ourselves unless the enemy is occupying DC. So I am nowhere near a capital-L Libertarian.

** This is also what troubles me about the FairTax. Despite the claims of advocates, a 23%/30% tax is a HUGE incentive for smuggling. The taxes that lead to cigarette smuggling are usually far less. I cannot imagine that a 23%/30% tax would not inspire many to either find ways to smuggle goods or else recategorize "new" goods as "used" through various deceptions. The mechanism itself simply leads to the circumstances which create smugglers, and smuggling, by its very nature, unlike tax evasion, creates a criminal class which tends to be hard to eradicate, and also commits not just economic but violent crime. And that is one of the main reasons I do not support the FairTax, the potential to either create a new mafia, or at least to revitalize existing criminal organizations. Compared to that, our current income tax scheme is not so bad.