As lawmakers look for ways to continue growing state budgets, they are increasingly turning to excise taxes, often known as “sin” taxes.
In the past, general tax hikes were often the answer. But voters across the nation have been rejecting broad tax increases by wide margins, either directly through voter referenda or by ousting tax-hiking legislators and replacing them with pro-taxpayer candidates in primary elections.
Even though taxpayers have been rejecting higher taxes, general fund spending in all 50 states increased from $274.7 billion in 1990 to $518 billion in 2003, an increase of 88.7 percent, according to Chris Edwards, Stephen Moore, and Phil Kerpen in their 2003 study, “States Face Fiscal Crunch after 1990s Spending Surge.”
“Morally Ambiguous” Products Targeted
Rather than reining in spending, many lawmakers have succeeded in finding other ways to fund additional spending increases.
A common expedient has been to levy excise taxes on “morally ambiguous” products such as alcoholic beverages and cigarettes and other tobacco products.
The list of states eyeing tax increases on cigarettes and other tobacco products, beer, wine, distilled spirits, or combinations thereof has grown long.
Numerous Cigarette Tax Hikes Proposed
Virginia enacted a two-step cigarette tax increase of 30 cents per pack last year. This year, legislators in more than 30 states have introduced more than 95 bills that include cigarette tax increases.
Illinois raised its cigarette tax 40 cents a pack in 2002, and earlier this year Gov. Rod Blagojevich (D) proposed another 75 cents per pack tax hike. If Blagojevich’s proposed tax hike goes through, the Illinois cigarette tax would be $1.73 a pack. In Chicago, where there are additional city and county cigarette taxes, the total tax would be $3.21 a pack.
Iowa, Wisconsin, and several other states are also still considering cigarette tax increases. In North Carolina and some other states, both tobacco and alcohol taxes are on the table. More than 40 different proposals for tax increases on beverage alcohol have been introduced or are pending introduction in the states.
After the Indiana House of Representatives passed a no-new-taxes budget, the Senate decided not to pass proposals to raise alcohol taxes, but included a 19-cent cigarette tax increase. The House and Senate bills now go to conference committees to iron out differences.
Derided as Tax Increases
In Mississippi, the House of Representatives on February 1 passed one of eight proposed cigarette tax hikes–a 50 cents per pack increase, from 18 to 68 cents–and a number of other tax increases, despite a veto promise by Gov. Haley Barbour (R). Barbour rejects tax increases as a matter of principle and sees the state’s budget problems as being on the spending side.
“Raising taxes is the enemy of controlling spending,” Barbour said. “Over the last 10 years, Mississippi tax revenue has increased 34 percent, but spending has increased 50 percent.”
The cigarette tax increase went nowhere in the state Senate, because Sen. Alan Nunnelee (R-Tupelo), chairman of the Senate Public Health Committee, decided not to bring it for a vote.
“The ‘tax-and-spenders’ have seized the cigarette tax, because the damage caused by cigarettes is so great,” Nunnelee said. “I’m not opposed to seeing the tax on cigarettes increase as long as it is offset by a tax cut elsewhere. So far, the proponents will not even consider a revenue-neutral cigarette tax bill, which I feel reveals their true motives. They want government to take in more money so they can spend it to buy constituencies.”
Targeted Tax Hikes
Paul Gessing, director of government affairs at the National Taxpayers Union, explained another reason for the current popularity of excise tax increases. “Such narrowly targeted taxes have become increasingly popular in recent years because legislators can raise significant revenue without raising taxes on a majority of their constituents, most of whom do not smoke or rarely drink,” Gessing said.
“There is no question that states plan to continue raising taxes on alcohol and tobacco products,” he noted, “but as tax levels reach a tipping point and revenue growth is reduced, states will look for new ways to levy excise taxes on smaller groups.”
Gessing points to real estate transfer taxes as an area that has received attention recently. Property values have risen dramatically in recent years, and policymakers sense an opportunity to grab more tax money. Another example of targeted excise tax increases is the recent attempt to apply existing hotel taxes to the fees charged by online travel services.
Acton Institute President Rev. Robert A. Sirico questions the motives behind such “sin taxes.”
“Interestingly, the state has a vested interest in people continuing this supposedly sinful behavior,” Sirico wrote in an April 28 commentary on the organization’s Web site. “Under a sin tax, the state finds itself in the peculiar and contradictory position to discourage certain behaviors while relying on their continuance as a source of revenue.”
Grover Norquist, president of Americans for Tax Reform, also questioned the motivation behind “sin tax” increases.
“It really is absurd,” Norquist said. “With the help of health activists fighting addictions, big government tax-and-spenders can expand their ever-increasing reach into citizens’ consumption decisions and wallets and thus fund their own addiction to spending.”
Jason Mercier, budget analyst at the Evergreen Freedom Foundation in Washington, advised, “legislators need to get out of the social engineering business and instead enact a uniform tax policy that treats all citizens equally. Cherry picking ‘sin’ taxes and other revenue raising schemes deemed to be politically safe ignores the most important equation in budget sustainability: spending restraint and prioritization.
“There will never be enough revenue to satisfy the spending demands of special interests,” Mercier said. “Targeting one class of citizens to pay for the programs of another is not only shortsighted budget policy, it’s morally wrong.”
Sandra Fabry ([email protected]) is state government affairs manager for Americans for Tax Reform.