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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