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211 IRET Congressional Advisory 1 (2006)

handle is hein.taxfoundation/iretcgadv0208 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote growth and efficient operation of the market economy. November 1, 2006 Advisory No. 211 WHAT ARE THEY SMOKING? Voters in Arizona, California, Missouri, and South Dakota are being asked to approve ballot measures on November 7 to raise their state cigarette taxes substantially. The expected revenue would supposedly be earmarked for various good works, such as health care for the uninsured, child care spending, recreation, environment, or property tax relief. Is this proposed rise in the tobacco tax good public policy? No. The ballot questions are best seen as ploys to get a majority vote for a tax hike by imposing the tax on a minority and pretending that the money will be earmarked for good causes. A tax on a minority is bad public policy. A good tax is borne by everyone, showing them that government is not a free good. Otherwise, what would stop the majority from making the minority pay for everything the majority consumes? We are nearly there for the federal income tax. The top 5 percent of income earners now pay over 50% of the progressive income tax. People in the bottom half pay less than 4% of the tax and often get money back after wage and child credits. For them, government spending other than Social Security is a free good. The poor are soaking the rich. Excise taxes are also bad taxes. They affect only a few selected products, hit hardest those people who most value them, and let others off lightly. The tobacco tax is a good example. Smokers are an unpopular minority being smacked by the majority. Unlike the income tax, cigarette taxes are highly regressive, for two reasons. First, a pack-a-day habit takes a bigger chunk out of a low annual income than a high one. Second, upper income individuals tend to smoke less than lower income people. Richer non-smokers don't pay the tax, and can use it to shift some of the cost of state spending to poorer smokers. The higher tax will induce some smokers to cut back, so the revenues will not rise in proportion to the tax rate. The states will also have higher costs of enforcement to counter additional smuggling and evasion, which they have mostly not considered. In California and Arizona, much of the remaining hoped-for revenue is pledged to child health or welfare programs. California, Missouri, and South Dakota would raise spending for hospitals and HMOs to help cover emergency room costs and other care for the poor and uninsured. California pledges a bit of the revenue to environmental protection, recreation, and general state spending. Most of the proposed spending is welfare. Most is already-mandated state spending. Only one measure, in South Dakota, would devote some of the tobacco money to tax relief (specifically, lower property taxes). There is no good reason to stick smokers with the cost of either property tax relief or welfare programs. Why should low income smokers who rent pay for property tax relief for higher income non-smokers who own homes? Why should welfare support costs be borne by a lower-income minority of the taxpayers? To create a false connection to g~*m 6 I g6~ 6 * Agg

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