Lifestyle Taxes Go Up in Smoke
When will politicians learn that raising "sin taxes" brings in less revenue than expected?
November 11, 2011 - 12:00 am
Back in the bad old days, we used to call them sin taxes. (Not to be confused with syntaxes for our more advanced readers.) You know the ones: when the government needs to raise some fast cash but can’t risk angering the unwashed masses in their entirety, they jack up fees on nasty habits such as smoking and drinking. Apparently they are now being rebranded as “lifestyle taxes.”
Don’t you feel better already?
The governor of Maryland, one Martin O’Malley, finds his state coffers in the all too common and predictable state of being essentially empty. Like any experienced politician, he’s falling back on the same old playbook described above. In July he jammed a 50% increase in the state’s liquor tax down the collective throats of those evil imbibers of spirits. Not satisfied with the hoped for $88M in revenue, Maryland will now consider a one dollar per pack tax increase on smokers.
It’s probably rather rude of me to point out that the vast majority of these fees will be paid for by the 99%, to borrow the parlance of the recent campers in the Wall Street district. But let us not cloud the issue with facts. We may, however, note that the article linked above mentions Governor O’Malley’s last attempt at enhancing revenue in the form of a 2008 millionaire’s tax on the top 1%. This resulted — and honestly, who could possibly have predicted it — in roughly one third of Maryland’s millionaires fleeing the state and filing no tax return at all the following year.
So how will the sin tax approach work out for him? Prognostication is a dangerous occupation at the best of times, but we do have a few examples to draw upon.
In 2006, Cook County, Illinois, conducted a similar experiment, imposing a two dollar per pack tax on smokes. Amazingly — and honestly, who could have predicted this either — their revenues from the tobacco tax plummeted from $200M in 2006 to $126M in 2010. The more optimistic among you might speculate that this cash flow disaster was the result of a healthier public eschewing their puffing habits and heading out to the local parks to jog and munch on granola bars. But while some number of people likely did kick the habit, local officials admitted that the vast majority of the net loss came from people avoiding the law and patronizing local shops who took their chances selling bootleg goods sans the local tax stamp.
Never ones to accept failure as an option, Cook County implemented an enforcement informant program. (Try saying that three time fast while puffing on a Marlboro and holding a martini in each hand.) They began paying out “rewards” of up to $1,000 for people who would report under the radar cigarette sales to the police and issuing massive new fines to local stores dodging the tax code. This failed to materially affect the tax revenue numbers, but it did manage to soak the taxpayers for tens of thousands in snitch fees while vacuuming $1.6M out of local small to medium businesses in fines.
Other smokers began moving to a “roll your own” plan, purchasing bulk tobacco, paper tubes and rolling machines. But state and local governments, such as in Wisconsin, have caught on to that game and are rapidly jacking up the taxes on those products as well.
In New York — noted for its annual competition with Massachusetts to be the highest taxed state in the nation — the combined list of local, state and federal taxes already have a pack of premium brand smokes going for more than eleven dollars in the Big Apple. Some upstate residents have taken to crossing over the border into Pennsylvania for their purchases, robbing the state of its cut of the pie entirely. But an increasing number are simply giving up on any pretense of living within the bounds of the law and are purchasing black market smokes off the back of the truck from smugglers. One recent report found that the Empire State was losing out on as much as $20M per month in tax revenue from this new age of prohibition era tactics.
None of these stories bode well for Governor O’Malley and his dreams of propping up his state’s floundering finances on the backs of smoker and drinkers. It’s an endless shell game, always seeking that perfect golden goose to fleece, but Maryland is rapidly running out of geese. Perhaps it’s time to take a page from the books of neighboring states and begin steadily driving down costs. A less expensive climate might begin to slow down the exodus of the wealthy and attract businesses to hire Maryland’s unemployed workers.
Who knows? A few of them might wind up making enough money to be able to afford a case of beer and a pack of Kools.