Wednesday, July 13, 2005

New Study Criticizes Use of Tobacco Taxes to Fund State Budget Shortfalls

A new study by Dr. Richard E. Wagner, Professor of Economics at George Mason University, outlines a number of negative consequences of using increases in state cigarette excise taxes as a means to fund government expenses that would otherwise have to be funded from general revenues.

One of the main points made in the article is that cigarette excise tax increases are a form of tax discrimination because they essentially force smokers to bear the burden of paying for programs that benefit others in society: "Tobacco taxation is a severe form of tax discrimination whose victims reside primarily among the working classes and not professional people. It is tax discrimination against people of modest means for the benefit of the well-to-do."

Wagner explains his reasoning: "With rare exceptions, people on whom excise taxes are imposed are not receiving public services in return. ... The victims of excise tax discrimination are forced to finance lower tax payments for those taxpayers who choose to buy things that aren’t taxed. ... The dedication of excise tax revenues for specific purposes is a growing fiscal practice. This practice gives the appearance not simply of raising taxes but of charging users for particular services, similar to the connection between gasoline taxes and road usage. In most cases, however, this analogy between a dedicated excise tax and a user charge fails because there is no connection between tax paid and service received. ... The dedication of cigarette tax revenues in this instance has nothing to do with charging people for their use of governmental services, and everything to do with creating a successful coalition of supporters who would gain from enactment of the measure."

The Rest of the Story

Despite my disagreement with some of the points made in the article, I tend to agree with the basic point it makes: that most excise cigarette taxes are a form of tax discrimination; I also agree that in most cases, such taxes are regressive as they force lower-income people (i.e., smokers) to bear the burden of paying for costs that should otherwise be shared by the general population. In other words, there needs to be some connection between tax paid and service received for a tax not to be considered discriminatory.

When cigarette taxes are raised primarily as a means of providing revenue for services that should have otherwise been funded through other means (i.e., from the general budget), then I view those taxes as being discriminatory and regressive, unless a substantial portion of the revenue raised is appropriated for services dedicated to those who are paying the tax. That is, a cigarette tax increase is generally discriminatory and regressive unless a portion of the revenue is dedicated to providing services specifically to smokers.

I think the key consideration in evaluating cigarette tax increases is whether or not the benefits of the tax accrue disproportionately to a population different from that which is bearing the tax burden.

For example, the Minnesota legislature will decide today whether to increase the excise cigarette tax by 75 cents per pack in order to balance the state budget and make up for what would otherwise be a budget shortfall. It is quite clear that the purpose of the tax, proposed by Republican Governor Tim Pawlenty, is simply to provide revenues to fund programs that the Governor wanted to include in the budget, but did not want to fund through other mechanisms.

In other words, Minnesota has a budget shortfall and the convenient option to make up that shortfall is to ask a disproportionately low-income population - smokers - to pay for those services for everyone else. Highly addicted smokers will carry the burden of paying for services that legislators should be funding anyway. It is up to the smokers of Minnesota to pay to avoid a government shutdown.

Why should the burden of avoiding a government shutdown fall solely on the smokers of Minnesota, especially when they are one of the lower income groups in the state?

The situation might be different if smokers were to be provided with services (such as smoking cessation services to help give them the opportunity to quit or education programs to help motivate them to quit). Then, at least one could argue that smokers are receiving a portion of the benefits of the tax revenue.

Some might argue that smokers will benefit from the tax because many will reduce their consumption or quit. But clearly, that is not the reasoning that is motivating the legislature. If they were that interested in the health and welfare of smokers, they would be doing something to directly help this population and to provide specific government services for them.

The reality is that although some smokers may quit, the majority will not and it is that large majority of smokers who is going to pay to keep the Minnesota state government running.

While the proposed cigarette tax increase in Minnesota is being billed as a "health impact fee," it is, in my mind, simply a discriminatory and regressive tax. It is a fiscal fix, not a public health intervention. And I do not think that public health practitioners should have anything to do with initiatives like this.

3 comments:

Francis Thompson said...

Though low-income people are disproportionately likely to be smokers, tobacco tax increases are probably the least regressive policy tool available in tobacco control (as well as being one of the most effective).

Why? Because low-income people are (not surprisingly) much more price-sensitive than richer people. When you do the math for Canada, for example, the lowest income quartile, collectively, does not increase its overall spending on cigarettes at all in the face of a tobacco tax increase -- enough poor people quit to make the tax increase revenue-neutral for that quartile. (See http://ideas.repec.org/p/nbr/nberwo/8962.html on this.)

On the other hand, providing smokers with more detailed and more graphic information about the health impact of cigarettes is almost certain to increase health and economic disparities, since on average, richer smokers are more likely to absorb the information and succeed in acting on it. This is still not an argument for keeping silent about health impacts, but it does highlight the absurdity of arguing that we shouldn't use our single most effective policy tool (taxation) because of fears about its impact on equity -- especially when that equity fear turns out to be incorrect.

Low-income smokers who do not quit in the fact of a tobacco tax increase are of course worse off. But the logical response to that is not to refrain from raising taxes, but to use some of the extra tax revenue (raised primarily from higher-income smokers) to increase transfer payments / tax credits for the poor in general.

If it were logical to refrain from tobacco tax increases because of fears about the financial impact on poor smokers, it would also be logical to have a government program to provide free alcohol to low-income alcoholics.

Michael Siegel said...

I don't see any logic in this argument: "If it were logical to refrain from tobacco tax increases because of fears about the financial impact on poor smokers, it would also be logical to have a government program to provide free alcohol to low-income alcoholics."

Francis Thompson said...

Not raising tobacco taxes in the US to something a bit closer to the OECD average amounts to an (unspoken) cheap cigarette policy. If this cheap cigarette policy is justified by the need to avoid reducing the money available to poor smokers to spend on basic necessities, then why not go whole-hog and ensure poor people's spending on addictive drugs goes to zero? My hypothetical example of providing free booze to poor alcoholics is simply a colourful example of this.