Washington Think Tank Says Reliance on Sin Taxes Won’t Work

Jan. 29, 2010

Washington Policy Center (WPC) concludes Washington state lawmakers, who are struggling to solve a $2.6 billion deficit, will not sustain a balanced budget by relying on sin taxes.

WPC, www.washingtonpolicy.org, draws these conclusions:

  1. Sin tax increases are not a viable long-term budget solution.
  2. Other states have failed to solve long-term issues with sin taxes.
  3. Washington netted $2.5 million less in tobacco tax revenue than anticipated in this decade.
  4. Society’s problems are not alleviated and taxes on sin products encourage black market smuggling.

The conclusions are contained  a paper authored by WPC’s Paul Guppy, vice president for research, and Betsy Hansen, a research assistant.

In considering sin-tax increases, lawmakers ostensibly have two motivations: They want revenue and they desire to change consumer behavior. That includes drinking, smoking, and overeating.

The authors state a past tobacco tax increase yielded $2.5 million less than anticipated because cigarette sales have decreased 1-2 percent a year. That’s after the state established the third-highest cigarette tax in the nation. Smokers have been buying their cigarettes from Indian smoke shops or from out-of-state.

Unproductive in other states

Lawmakers in other states have been unsuccessful after raising sin taxes, according to the study:

“Ten states increased cigarette taxes: Arkansas (new rate of $1.15), Florida ($1.34), Hawaii ($2.60), Kentucky($0.60), Mississippi ($0.68), New Jersey ($2.70), New Hampshire ($1.78), Rhode Island ($3.46), Vermont ($2.24) and Wisconsin ($2.52). New York and New Jersey hiked taxes on alcoholic beverages.”

The Tax Foundation found that in most cases, state lawmakers’ plans failed to achieve either of the goals advanced to justify excise tax increases. The tax increases did not significantly change peoples’ behavior, and they failed to generate the new revenues their sponsors predicted.

The shortfall in expected revenue, combined with chronic overspending, contributes to unsustainable budgets and contributes to an ongoing sense of crisis in state finances.

Federal cigarette taxes

WPC points out that a new federal law was enacted in Feb. 2009. It raised the price per carton by $6.16. The goal is to fund the State Children’s Health Insurance Program (SCHIP) for four million kids.

However, the results have opposite of what was expected, according to the study:

“Public revenues, businesses and consumers are affected at both the state and local levels. As the federal increase affects the retail price of tobacco products and consumption shifts, states with already high cigarette taxes collect less revenue for themselves.

Businesses experienced a fall in demand for their goods and smokers feel policymakers are unfairly punishing them for engaging in politically unpopularbehavior.”

The revenue shortfall for fiscal year will total $2.3 billion.

WPC believes Washington state coffers are expected to suffer, as well:

“Combined with a high federal levy, Washington state’s high cigarette tax creates a strong incentive for consumers to engage in systematic tax avoidance, through increased internet purchases, out-of-state trading, and black market sales. For example, Washington’s state cigarette tax is nearly 20 percent higher than Idaho’s state tax, and more than 70 percent higher than Oregon’s state tax.”

Let’s hope for government reform so that lawmakers aren’t tempted to scurry around for superficial means to balance the budget. At stake are economic and political liberty.

From the Coach’s Corner, for common-sense efficiencies in Washington state, here are other recent columns:

“The difference between stupidity and genius is that genius has its limits.”

-Albert Einstein

 

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Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Do Washington’s Budget Woes Warrant Government Reform?

 

Updated 1o:oo a.m. Tuesday December 15, 2009

“We can’t solve problems by using the same kind of thinking we used when we created them.”                                 – Albert Einstein

 

In applying the logic of the famed Nobel Prize winner to Washington state’s multi-billion dollar budget woes, it would appear government reform is needed for good government. Washington is mirroring California and its budget anguish. However, Gov. Chris Gregoire and state lawmakers say tax increases are necessary to deal with the red ink.

Not so fast say authoritative observers outside state government. Productive steps are necessary to solve the ever-deepening budget hole, which was $2.6 billion in the last forecast despite the massive temporary infusion of federal stimulus dollars.

“At this point, this is a whole new ballgame,” says Jason Mercier, who is the director of the Center for Government Reform at Washington Policy Center (WPC) in Olympia, WA. “Even before the recession, which followed a bubble and fake consumer spending, the spending was not sustainable – this is a reset of spending of what the economy can really bear.”

But Mr. Mercier warns us about a list of suggested tax increases by the Department of Revenue. The agency’s list suggests taxes on tax-exempt credit unions, business and occupation tax increases, and hikes on the so-called sin taxes. The Department of Revenue list was first unearthed by the savvy staff at Everett’s The Daily Herald.

“We need to evaluate services from government,” adds Mr. Mercier. “Increasing taxes during a recession would add economic hardship, while changing the way services are delivered offers part of the solution to closing the deficit without raising taxes.”

WPC’s Communications Director John Barnes issued a press release in April, 2009 stating 32 economists believe tax increases will not lead to recovery.

A Washington political economist also says he is not persuaded about the justification for tax increases.

“First of all, the Governor’s budget is not a serious proposal,” says Dr. Mathew Manweller, a professor of political science at Central Washington University in Ellensburg, WA. “It is what I call a ‘bluff budget.’ She wants a tax increase to cover state services.

“But to get there, she needs to propose draconian cuts to convince people to support a tax increase,” he adds. “In essence, this is a ‘give me your wallet or little Toto gets it’ budget.”

A favorite of businesspeople because he is succinct and accurate in his assessments, Dr. Manweller cites a myriad of reasons for the budget headaches.

“On one level we have very powerful state employees unions,” Dr. Manweller explains. “Their financial demands on the budget in terms of salaries, no-risk pension plans, double dipping, and comparable wage laws are killing us.”

Indeed, at an $83 million cost to taxpayers in 2010, here’s a disturbing headline: Thousands of state workers in line for substantial raises.

Mr. Mercier says another budget problem is the Legislature’s under-funding of public sector pensions.

“They are still skipping payments and must make mandatory pension payments in 2013,” he says. “Government has over promised what the economy can deliver.” 

“Add to that an aggressive environmental lobby that essentially has the DOE and DNR in its back-pocket after the Goldmark election and Jay Manning tenure at DOE, it is difficult to encourage any private development,” the professor says. (He’s referring to Mr. Manning who formerly ran the Department of Ecology, and Peter Goldmark who is Commissioner of Public Lands and who also heads the Department of Natural Resources.)

“We also see a variety of federal mandates that are passed down to states that are passing them down to counties and cities,” adds Dr. Manweller. “More and more revenue is going to what economists call ‘dead weight loss’ or non-productive labor.

“Take those issues, throw in a national economy that is ailing, and you are going to get a struggling economy,” concludes Dr. Manweller.

Budget solutions

Mr. Mercier is among those who contend the budget can be balanced by also taking advantage of the state’s competitive contracting law that’s been virtually ignored since 2002.

“The Legislature and Gov. Locke authorized state agencies to open up public work traditionally held as an in-house government monopoly to competitive bids from the open market,” he points out. “Public employees are encouraged to participate in the bidding process, because the intent of the law is not to benefit private companies, but to secure the best service for the public no matter who does the work.”

The WPC conducted a study of 20 state agencies and guess what?

“In practice, however, state managers rarely exercise their statutory contracting out authority, meaning an important provision of the 2002 civil service law remains largely unused,” says Mr. Mercier.

This raises another question: Why is the state of Washington in the liquor business?

Two State Senators, Tim Sheldon (D-Potlatch) and Curtis King (R-Yakima) have introduced a bill to privatize Washington’s monopoly of 161 stores and 1,469 liquor employees.

Do you find this hard to believe? It’s true. Washington employs nearly 1,500 liquor employees when the private sector would function better. Furthermore, here is Washington’s 2009 personnel report.

As a management consultant who has worked experienced at least five recessions, I know it is not wise to try to tax our way out of a recession. All we have to do is consider the federal tax cuts of 2001 and 2003. They were instrumental for the ensuing economic upturn.

A professor of economics at Harvard University, N. Gregory Mankiw, drew similar conclusions about taxes and recessions in The New York Times in Dec. 2009, “Tax Cuts Might Accomplish What Spending Hasn’t‎.”

He mentioned a 2007 study by David H. Romer and Christina D. Romer at University of California at Berkeley. (Ms. Romer is now the Chairwoman of the Council of Economic Advisers in the Obama Administration.)

“Our estimates suggest that a tax increase of 1 percent of GDP reduces output over the next three years by nearly 3 percent,” wrote the study’s authors.

In conclusion, yes, Washington’s budget woes do warrant government reform. But Washington’s government simply demands more money. There’s increasing talk of tax hikes while countless state businesses and citizens are desperate and hurting.

The state has a spending problem, not a revenue problem.

This is a critical time – government reform is necessary.  We need to heed the Einstein quote. At stake are economic and political liberty for Washington businesses and citizens.

From the Coach’s Corner, here is more reading on how to solve Washington budget woes: “Analysis: Steps for Economic Success in Washington State.”

Here are more resource links:

Analysis: Steps for Economic Success in Washington State

 

July 29,2009 –

 

In assessing economic-development strategies, it’s shortsighted to merely look at the headlines. But you can tell a lot about the economy by taking a cursory look at the unemployment rate. Unfortunately, Washington ranks No. 34 in the nation – tied with Missouri at 9.3 percent.

How can government brighten the unemployment picture? The effectiveness of economic policies depends on government and whether it has economic wisdom. That means allowing for economic and political liberties.

Economic liberty is the freedom to make decisions in a free-enterprise system. Political liberty is possible when government stops its unproductive practices so entrepreneurs can have the necessary tools to create jobs and take full responsibility for their successes or failures.

Here are economic strategies for government to consider:

Discernment of Main Street’s issues. Listen to business. This column warned about economic conditions long before the recession was recognized. My confidential discussions with businesses revealed an undercurrent of pending economic chaos long before the recession was publicly acknowledged.

Encourage consensus building among stakeholders, including business and unions. Adversarial relationships and chest-beating fail to create and maintain jobs. Better communication among stakeholders is paramount. Management must listen to workers, and develop quality plans and implement them. Unions need to understand how business works. In other words, choose to disagree but focus on principles, not personalities.

Prioritize government services. You might recall the inspiring headlines when Gov. Gary Locke implemented Priorities of Government budgeting. The goals were fiscal responsibility while providing quality services. But when was the last time we enjoyed such headlines? To most businesspeople, government is not concerned with performance, but is seen as focused on imposing financial barriers and justifying costs.

Develop budgets that enable us to live within our means. Admirably, Gov. Chris Gregoire publicly denounced tax increases when the economy soured. It was heartening news.

But public servants have a history of failure to treat budgets as they would their own pocketbooks. You might recall when state spending skyrocketed by an average of more than 17 percent per biennium – so voters passed Initiative 601. They obviously wanted spending limits, but the Legislature amended I-601 seemingly countless times. To make matters worse, a lawsuit was filed when government played what was described as a shell game to artificially manipulate spending limits.

Another challenge: Underfunding of government pensions. In addition, except for many big-business CEOs, public-sector pensions are too laissez-faire compared to the private sector – a time bomb set to go off.

Quality government behavior. Many government workers try to do a good job. But some employees overseeing business, e.g. Department of Revenue employees, do not understand their own regulations.

In a panic to increase revenue, they’ve forced businesses to waste time and resources to justify tax filings because the agency employees were unfamiliar with their own guidelines.

Agency employees could learn another lesson from the private sector. Companies succeed when they correct their mistakes and apologize to customers.

Create a healthy tax system. Start by listening to small business owners – review and correct the state’s business and occupation tax. Washington’s B&O tax is unfair. The tax is based on a business’ gross receipts instead of net profits. It’s a major reason why new companies fail to sustain their workforces and close down.

And why should companies carry the burden for more than 50 percent of state and local taxes? Washington is the second-highest in the nation for unemployment insurance taxes and the third-highest for workers’ compensation benefits.

Government must review its policies, procedures, taxes, fees and charges. At every juncture, governments should ask the question: “Is this productive for economic development?”

Outlaw predatory financial practices. Thousands of state residents have been victimized in financial services – from credit card companies to post-transaction marketing. Work with representatives in Congress to outlaw predatory behavior by credit card companies and debt collectors.

To his credit in 2009, Attorney General Rob McKenna requested lawmakers to pass a law that would stop the deceptive Internet marketing behavior of a Bellevue company, Intellius. But lawmakers failed to act. 

Instill greater public confidence. Today’s public officials can learn lessons from President Franklin D. Roosevelt and his fireside chats on radio to reassure Americans. Businesses will start making investments in their businesses and hiring workers, if they have reasons to be confident.

After developing strategic plans, government leaders at all levels – the state, counties and cities – can be a positive influence. Like any good marketing campaign, they should tell the public what they’re going to do to improve the economic climate. Remind citizens as they enact new policies and procedures. Then, tell businesses about their economic accomplishments.

If governments get this done, Washington will become the leader.

From the Coach’s Corner, it’s helpful to be mindful of I call “The 20 Characteristics of a Healthy Economy.”

Here are my 20 healthy-economy characteristics:

  1. A big-picture consensus and strategic plan for economic development
  2. Action plan resulting in increased entrepreneurship – local businesses that hire more local workers
  3. Diverse industry base of employers
  4. Success at encouraging families and businesses to invest and locate in the community
  5. Family wage jobs
  6. Decreased need for social services
  7. Balance between responsible development and redevelopment without driving out residents or businesses
  8. Infrastructure and solutions, including diversity of land uses that are self-sufficient without relying on outside sources for repeat, large funding
  9. Growth that doesn’t damage the environment or use excessive space
  10. Accessibility and equity for residents in education, employment, housing and transportation
  11. Happy and healthy residents who have a strong pride in the community
  12. Festivals and celebrations
  13. Positive public image
  14. Enhanced shopping opportunities
  15. Anchor projects that encourage commercial, retail and related mixed uses
  16. Optimal tax revenue
  17. Continuous efforts for beautification, for improvement in quality roads and transportation
  18. Widespread charitable contributions for robust nonprofit organizations – vibrant civic and service clubs, churches and their respective organizations, and other groups.
  19. Open and creative community leadership that encourages and nurtures emerging leaders
  20. Ongoing review and fine-tuning of the strategic plan for economic development and creation of jobs

Seattle business consultant Terry Corbell provides high-performance management services and strategies.