In an effort to combat what he claims is a $700 million budget shortfall, Alabama Gov. Robert Bentley (R) has proposed a series of tax increases designed to generate $541 million in new tax revenue. These eight tax increases include a rise in the sales tax for automobiles, a tax on car rentals, and an excise tax on tobacco products.
The proposal also includes the removal of credits for certain businesses such as financial institutions and insurance companies, ending the municipal exemption for the public utilities license tax, and a new corporate income tax provision requiring combined income reporting for corporations doing business in other states. All of these tax hikes are a reversal of Bentley’s pledge to not raise taxes. The tobacco tax rental car tax increases are especially problematic.
Cigarette taxes, like all sin taxes, are an unreliable revenue source and encourage smuggling and other illegal actions. Bentley’s proposal would increase the state’s cigarette tax by 82.5 cents per pack, which he estimates would generate $205 million, but tobacco taxes rarely bring in the revenues their proponents promise. Instead, sin taxes prop up government spending while relying on a narrow and shrinking tax base, thus creating greater revenue gaps taxpayers must fill with additional tax increases.
Tobacco taxes are highly regressive, burdening those who can least afford to pay while diverting spending from other products and services. According to data from the Centers for Disease Control and Prevention, 34 percent of Alabama adults who earn less than $15,000 per year are smokers, whereas only 13.6 percent of adults who earn $50,000 or more smoke.
The tax increase will likely drive Alabama consumers to purchase tobacco products in neighboring states. Currently, Alabama’s tobacco taxes are on par with its neighbors’, but after the increase, the tax would be between 50 cents and $1 higher than those in its surrounding states.
Bentley’s tax plan would increase the rental-car tax from 1.5 percent to 4 percent. Tourism taxes such as those on car rentals have advantages for politicians because they supposedly tax out-of-state visitors who cannot vote against them. Rental car taxes, however, don’t affect tourists alone. According to Auto Rental News magazine, more than half of rental car consumers are local, not tourists. This local consumer base includes people waiting for auto repairs or engaging in short-distance household moves.
According to the Cost of Government Center, taxes account for roughly 38 percent of the average cost of renting a car. Car rental levies usually consist of two separate taxes: the conventional state or local sales taxes imposed on most goods and services, plus the newer state and local excise taxes imposed specifically on car rentals. When the cost of renting a car increases, however, tourists are unable to spend their money elsewhere, hurting lodging, food, and entertainment industries.
Sin taxes and tourism taxes distort markets, reduce economic competitiveness, and encourage unsustainable increases in government spending while placing an excessive burden on lower-income taxpayers. Instead of creating and increasing discriminatory taxes, states should focus on tax reform that lowers rates, puts dollars back into the pockets of taxpayers, and encourages government efficiency by creating reasonable limits on spending.
The following documents examine sin and tourism taxes from multiple perspectives.
Alabama Gov. Robert Bentley Unveils Details About $541 Million Tax Increase
Mike Cason of AL.com examines Alabama Gov. Robert Bentley’s (R) tax increase proposal, the various levies it will introduce, and the reaction from legislators.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Rich States, Poor States
The sixth edition of this publication from the American Legislative Exchange Council and authors Arthur Laffer, Stephen Moore, and Jonathan Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
Alabama Governor Unveils $541 Million Tax Hike
Will Upton of Americans for Tax Reform criticizes Alabama Gov. Robert Bentley’s (R) tax hike and argues it is not the way Alabama should tackle its budget problems: “The fact is, between 2000 and 2009, state spending in Alabama has exceeded the rate of inflation and population growth by just over $20 billion. There is room for spending restraint. A long term plan to reduce the state’s out-of-control spending would go a long way to solve the current budget mess and ensure predictable and sound budgets in the future.”
Sin Taxes: Size, Growth, and Creation of the Sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social-welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by affected industries.
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation.”
Taken for a Ride: Economic Effects of Car Rental Taxes
William G. Gale and Kim Rueben analyze several aspects of the economics of car rental excise taxes, considering the following questions: Why is the use of car rental taxes increasing? Are actual and proposed car rental excise taxes economically sound means of collecting public monies? Does the taxation of the customers of one industry place an unfair and disproportionate burden on too few members of society to fund a “public” project? What are the effects of car rental excise taxes on local consumers and businesses?
Research & Commentary: The Damaging Effects of Tourism Taxes
Heartland Institute Government Relations Director John Nothdurft examines tourism-related taxes and their negative effects on tourism and a city’s economy. “Instead of kicking an industry while it is down, states and localities should focus on reining in their budgets by eliminating subsidized development schemes such as sports stadiums and convention centers,” Nothdurft writes. “In order to promote tourism as part of a strong state or local economy and have a stable budget, it is vital to create a non-distorting tax code with low rates and a broad base, coupled with spending reforms.”
Effects of Discriminatory Excise Taxes on Car Rentals
This study by the Brattle Group found car rental taxes fall disproportionately on minority households, raise auto insurance costs, and reduce purchases of cars by rental companies. A 10 percent increase in taxes relative to the base rental rate reduces rental demand and purchases of new cars by rental car companies by approximately 12 percent.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Logan Pike, Heartland’s government relations manager, at [email protected] or 312/377-4000.