Excise Taxes Impose Growing Burden on the Poor

Published October 1, 2007

See if this rule makes sense to you: If you want to help poor children, do not raise taxes on poor families.

Excise taxes on items such as cigarettes, alcohol, gasoline, and telephone service may be a minor nuisance to a wealthy person, but they take up a significant share of a low-income family’s income.

These taxes are notoriously regressive. First, the poor spend a much larger percentage of their income on consumer goods, so they pay a larger percentage of their income in taxes. Fifty dollars per week for gas is a much bigger deal to the day-care worker who brings home $300 per week than to the lawyer who brings home $300 per hour.

Second, politicians have decided to impose especially high taxes on products the poor are more likely to buy. In some cases the total dollar amounts paid by the poor are higher than the amounts paid by the rich.

Cigarettes, Liquor Hit Hard

Smoking rates differ greatly across the income and educational spectrums. One-third of lower-income U.S. adults smoke, versus one-fifth of middle- and high-income earners, according to the Centers for Disease Control and Prevention. High school dropouts who smoke spend three to four times as much of their income on tobacco products as professionals who smoke (4.47 percent and 1.27 percent, respectively).

Taxes on beer, wine, and liquor also burden the poor disproportionately. The portion of income spent on alcoholic beverages by the lowest fifth of earners is double that of middle earners and more than three times that of the highest earners, on average.

Some health policy advocates claim taxes on harmful behaviors–such as smoking and excessive drinking–are justified to recoup the costs those activities impose on others, such as secondhand smoke and drunk driving. Smoking does impose real costs on others, but almost all available evidence indicates taxes on tobacco already more than compensate for them.

Responsible drinking imposes few social costs and perhaps some substantial benefits. The real social cost of drinking comes from those who abuse alcohol, yet alcohol taxes punish moderate drinkers for the behavior of alcoholics.

Behavior Changes Doubtful

Advocates also claim these taxes encourage people to change their behaviors in socially desirable ways. This is questionable. A few consumers will quit, but many more will substitute lower-cost brands.

In any case, this paternalistic argument (“We’re going to raise taxes to force you to do what we know is best”) is really disingenuous–these taxes are designed to raise revenue, not discourage unhealthy behavior.

If legislators really believed raising taxes would discourage unhealthy behavior, they wouldn’t count on a declining revenue stream to fund a health program like the State Children’s Health Insurance Program, whose costs are certain to skyrocket.

Necessities Cost More

As if taxes on cigarettes and alcohol weren’t enough, poorer taxpayers are also disproportionately burdened by excise taxes imposed on modern-day necessities such as gasoline, utilities, and telephone services. Again, since lower-income households spend more of their incomes on these items, they pay a greater share of these taxes.

Statistically, people making $24,000 a year spend more than twice as much of their income on gasoline as those earning five times as much. People making less than $10,000 a year spend nearly one-fifth of their incomes (18.8 percent) on necessities subject to excise taxes, including utilities and public services. They pay almost six times as much of their incomes on these taxes as the highest earners.

The lowest fifth of income earners spend nearly one-third of their income on alcohol, tobacco, utilities, and gasoline, on average. The highest earners spend just 6 percent of their income on these items.

This new system of raising taxes on “sins” and necessities is actually punishing those who have the temerity to be poor. Adding insult to injury is that this money is being earmarked for entitlement programs to help people earning more in annual salary than those most affected by these taxes.

Michael L. Davis is project manager and lead lecturer at the Edwin L. Cox School of Business at Southern Methodist University and senior fellow at the National Center for Policy Analysis. Robert McTeer is distinguished fellow at the National Center for Policy Analysis. They may be contacted through [email protected]. This essay is based on the conclusions of their study “Taxing the Poor,” released in June by the National Center for Policy Analysis.

For more information …

“Taxing the Poor,” by Michael L. Davis and Robert McTeer: http://www.ncpa.org/pub/st/st300/