JOHN HOOD: State's Excise Tax Hike Looks Like a Stick-Up
"In the absence of justice," St. Augustine once wrote, "what is sovereignty but organized robbery?"
What indeed? The North Carolinians who regularly consume alcohol and cigarettes are not personally responsible for the state's budget crunch, the nation's bailout/stimulus mania, or the world's economic recession. It would be unjust to compel them to shoulder a disproportionate share of the cost of grappling with these issues.
And yet, that seems to be exactly what some state lawmakers and Perdue administration officials are planning to do.
While Gov. Beverly Perdue still rules out "a broad-based tax increase," by which she means a hike in sales or income taxes, she hasn't been nearly as dismissive about the idea of raising excise or other special sales taxes on smokers and drinkers.
It's become a well-worn path in recent years. Facing a series of spending gaps earlier in the decade, the General Assembly has already resorted to raising the state's excise tax on cigarettes to 35 cents a pack. Most states in the country still have higher cigarette taxes, but we're gaining on them.
As for alcohol excises, leaders of the North Carolina Senate have long favored raising the state's taxes on beer, wine, and liquor, which are already way-high by national standards (ranking sixth, 18th, and 10th respectively, according to the Tax Foundation).
The calculation appears to be that singling out smokers and drinkers for punitive taxes is less fraught with political peril than hitting up the general public. Perhaps this calculation is correct. But it's not enough to justify raising those taxes at this time.
For one thing, targeted sales taxes may be less unpopular than income taxes, for example, but that doesn't necessarily make them popular. Particularly with regard to taxes on beer and wine, I don't think it will be that difficult to channel the anger of the affected taxpayers into political action. The public is already in a sour mood, thanks to the deepening economic crisis and the evident absurdity of Washington's "borrowing-for-bailouts" mentality. Politicians who promise higher taxes on beer and cigarettes should expect a populist backlash.
More importantly, though, trying to take the (relatively) easy way out of a difficult problem is not leadership. North Carolina politicians should oppose higher excise taxes because they are poor public policy. They make our state tax code more regressive. They damage the producers and retailers of the taxed products, which include some of North Carolina's major employers.
And they put the state in the awkward position of attempting to depress consumption of what are considered harmful products while not depressing it so much that the state loses a dependable revenue stream. State tobacco taxes, for example, interact with the federal tax and North Carolina's share of the national tobacco settlement, itself a form of taxation, to such an extent that raising one tax may result in offsetting revenue losses from the others. In other words, it is unlikely that state politicians will truly net as much money from raising these taxes as they think.
So would it be worth all this trouble? Not really. Currently, special taxes on cigarettes and alcohol bring in about $470 million. Even if these taxes were doubled -- and no one to my knowledge is advocating anything like that large a tax increase -- the proceeds wouldn't go very far in filling in next year's budget deficit. The current projection, after deducting the full fiscal impact of the federal bailout, is about $2 billion.
North Carolina's tax code is not supposed to be a medical prescription or a behavior-modification device. Its one and only job is to bring in sufficient revenue to finance core governmental responsibilities. Judged on that criterion, special taxes on cigarettes and alcohol fail. We should tax all personal consumption once, at the same marginal tax rate, and leave it at that. The current policy is, truly, little more than the organized robbery of drinkers and smokers.
Man, if I weren't such a boring teetotaler, this is the kind of thing that would drive me to drink.
John Hood is president of the John Locke Foundation and publisher of CarolinaJournal.com.
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