Sin taxes hurt business and society in general

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Christopher Buckley wrote a funny novel a decade-and-a-half ago titled, “Thank You for Smoking.” It focused on three lobbyists billing themselves as the MOD (Merchants of Death) Squad, representing the tobacco, alcohol and gun industries.

It was an amusing send-up of politics, lobbying, and neo-Puritan political correctness focused on “sins” as defined by the political Left.

That neo-Puritan impulse remains alive and well today in the world of politics. In recent years, however, the green movement has managed to add fossil-fuel-based energy to the list of sinful industries. You know, so-called manmade global warming and now the Gulf oil spill. To a certain degree, oil companies have replaced guns on the lefty naughty list, as some Democrats in more moderate-to-conservative states have found it necessary to be more supportive of Second Amendment gun rights in order to stay in office.

In addition, candy, soda and fast-food firms are under fire, with so-called “fat” taxes being pushed.

No matter what the current lineup happens to be, though, the effort to demonize certain industries serves as a convenient excuse to hike taxes. Indeed, many politicians have been downright enthusiastic about jacking up taxes on smoking, drinking alcoholic beverages, eating fatty foods, and filling up at the pump. That enthusiasm has been driven to new heights as elected officials work in a down economy to find new sources of revenue to support their own spending addictions.

Much of the rhetoric is about public health and saving the planet, but the reality is about funding big government.

The latest move on the “sin” tax front came on June 21 in New York. In a measure that passed the state legislature on a party line vote — Democrats in favor, Republicans opposed — the state’s $2.75 per pack cigarette tax will rise by 58 percent on July 1 to $4.35. That’s the highest state tax in the nation. New York City chimes in with its own tax of $1.50 per pack, making for a combined city-state levy of $5.85.

According to Stateline.org, five other states hiked tobacco taxes this year, with another 14 states doing so last year. This continues a long stretch of tobacco tax hikes. The average per pack cigarette tax among the 50 states and District of Columbia jumped by 229 percent from January 2000 to February 2010 (based on data from The Tax Foundation) — from 41 cents to $1.35. All but four states increased their cigarette taxes over this period.

In addition, the federal government imposed its largest tobacco tax increase last year, with the tax on a pack of cigarettes going from 39 cents to $1.01, and on little cigars from 4 cents also to $1.01.

Though not as dramatic, state taxes clearly moved up over the last decade on gas and beer as well.

The average tax at the pump, for example, jumped from 19 cents in January 2000 to 26 cents in February 2010, an increase of 37 percent. Forty-two states and the District hiked their gas taxes.

On the federal level, climate change legislation featuring a cap-and-trade regulatory scheme mandating reductions in carbon-dioxide emissions would, in effect, mean imposing a crushing energy tax on the economy. For example, a 2009 study by the Heritage Foundation estimated that such a system eventually would raise real gas prices by 74 percent.

As for beer, 12 states increased their excise taxes from early 2000 to February 2010. San Francisco reportedly is considering the imposition of a city tax on alcoholic beverages, and a new beer tax just went into effect in Washington State.

And in the name of fighting fat, Colorado and the state of Washington extended their sales taxes to soda and candy, with governors in New York and Massachusetts calling for similar fat levies.

Higher so-called sin taxes spell trouble on several fronts. Fundamentally, all of these tax increases negatively affect the overall economy by draining resources away from the private sector, and handing more resources over to government. Consumers obviously face increased prices and/or fewer choices in the marketplace.

Retailers directly experience lost sales due to higher tobacco, alcohol, and food taxes. Many, if not most, of these firms turn out to be mom-and-pop shops. In addition, as cigarette taxes rise, additional costs kick in related to an expanding underground economy and smuggling that feeds larger criminal activities.

As for energy taxes, no part of the economy escapes the negative consequences of the resulting higher costs, including lost U.S. output, competitiveness, and jobs. Again, small businesses tend to be least able to absorb such costs, nor can they just pick up operations and move to another nation where energy costs are lower.

Then there’s the overarching problem beyond straightforward economics. “Sin” taxes pushed by anti-tobacco, anti-fossil-fuel, anti-alcohol, and anti-fatty-foods zealots mean an expansion of the Nanny State at the cost of reduced individual freedom. Not only does government wind up grabbing more dollars from the pockets of consumers and the cash registers of businesses, but politicians, their appointees, and the special interests gain more control over everyday decision-making — from the types of cars people drive to what they eat and drink.

While many activities individuals choose to undertake might not be healthy, most are not, in any legitimate sense, a concern of government. Indeed, it’s a distinctly unhealthy trend when individual responsibility gives way to political control.

Keating is chief economist for the Small Business and Entrepreneurship Council. He can be reached at rkeating@sbecouncil.org.