Would a Porn Tax Hurt Sales?

A California state assemblyman has proposed dealing with the state’s huge budget shortfall by taxing pornography, including the production and sale of pornographic videos — by 25 percent.

To an economist this initially sounds like a good idea: An ideal tax is one that doesn’t cause any change in behavior — doesn’t generate any excess burden on the economy. I believe the demand for pornography is quite inelastic, so I don’t expect sales to be reduced much if porn prices rise as producers try and succeed in passing this tax along to consumers.

But demand is only one side of the market: A tax only in California gives producers an incentive to move their operations elsewhere. I don’t know how attached porn video producers are to LA, a leader in this and all other aspects of the movie industry; but I wouldn’t think the fixed costs of production are very high, and I bet that workers in this industry are fairly mobile too.

That being the case, this tax might generate a substantial dead-weight loss, as a lot of production shifts to other states that don’t impose the tax. The tax might raise revenue — that depends how many producers go elsewhere; but it will certainly reduce output in this major California industry.