Tax­man cometh: Hard-pressed politi­cians pro­duce flood of ir­ri­tat­ing rev­enue steams

The Washington Times Weekly - - Politics - BY DAVID M. DICK­SON

State and lo­cal gov­ern­ments are rais­ing taxes and in­vent­ing new ones as they scram­ble to bal­ance their bud­gets even as the na­tion’s econ­omy be­gins to emerge from the deep­est re­ces­sion in seven decades.

State bud­gets typ­i­cally take a year or two to re­flect im­prove­ments in the na­tional econ­omy, the Na­tional As­so­ci­a­tion of State Bud­get Of­fi­cers and the Na­tional Gov­er­nors As­so­ci­a­tion ex­plained in its lat­est fis­cal sur­vey of states. The re­port warned that “state fis­cal con­di­tions will re­main weak in fis­cal 2010 and likely into fis­cal years 2011 and 2012.”

So, brace your­selves for a del­uge of nui­sance taxes, sin taxes and “fees,” lim­ited only by the imagination of rev­enue-starved gov­er­nors, may­ors and leg­is­la­tors.

Rais­ing fees and nui­sance taxes amounts to noth­ing more than “tax ad­ven­tur­ism,” said Jonathan Wil­liams of the Amer­i­can Leg­isla­tive Ex­change Coun­cil, a non­par­ti­san or­ga­ni­za­tion of state leg­is­la­tors.

Gov­er­nors and leg­is­la­tors “of­ten raise taxes and in­crease fees dur­ing tough bud­get times be­fore re­sort­ing to hik­ing broad­based in­come and sales taxes,” said Mr. Wil­liams, who co-au­thored the re­cent book, “Rich States, Poor States.”

Fre­quently, the tar­gets are out-of-state vis­i­tors who find them­selves pay­ing higher car­rental taxes and ho­tel taxes, as they will in Or­lando, Fla., Ne­vada and Hawaii, Mr. Wil­liams said.

The In­ter­net is also be­com­ing a big­ger tar­get. New York re­cently im­ple­mented an “Ama­zon tax,” which will re­quire small busi­nesses to charge sales taxes for goods they sell over the In­ter­net.

Cam­eras catch­ing speed­ers and red-light crash­ers have be­come more ubiq­ui­tous in Mont­gomery County, Md. and the District of Columbia since the re­ces­sion be­gan in late 2007. Turn­pike and bridge tolls have also been ris­ing across the na­tion. The car toll for the Golden Gate Bridge in San Fran­cisco, for ex­am­ple, jumped 20 per­cent to $6 last Septem­ber.

Even “man’s best friend” could not es­cape the clutches of rev­enue rais­ers in Mas­sachusetts. The Demo­crat-dom­i­nated leg­is­la­ture there slapped a $3 state sur­charge on mu­nic­i­pal li­cens­ing fees that dog own­ers must pay for their pets. An­gry Repub­li­cans im­me­di­ately dubbed the bill “Toby’s Law” in honor of Demo­cratic Gov. De­val Pa­trick’s Labrador re­triever.

The costs of get­ting mar­ried — or di­vorced — are also ris­ing in some ju­ris­dic­tions.

If the Penn­syl­va­nia House gets its way, the state mar­riage li­cense fee will jump from $3 to $28. The ad­di­tional rev­enue from this “mar­riage tax” will fi­nance do­mes­tic pro­grams by the Depart­ment of Pub­lic Wel­fare, prompt­ing sup­port­ers to de­clare that one staunch op­po­nent of the in­crease “clearly has a prob­lem with pre­vent­ing do­mes­tic vi­o­lence in Penn­syl­va­nia.”

In Iowa, the cost of a di­vorce in­creased to $100 af­ter the state leg­is­la­ture dou­bled court fees for fil­ing di­vorce pa­pers.

States and lo­cal­i­ties are rais­ing or in­tro­duc­ing var­i­ous sin taxes and fees be­cause rev­enue streams from other sources are shrink­ing.

Ob­vi­ously, as un­em­ploy­ment soared and con­sumer spending de­clined dur­ing the re­ces­sion, rev­enue from in­come and sales taxes plunged across the coun­try. But th­ese rev­enues tra­di­tion­ally plum­met dur­ing eco­nomic down­turns. Many states re­sponded by rais­ing their in­come­and sales-tax rates.

How­ever, for the first time, state and lo­cal rev­enues from gam­bling — im­per­vi­ous to pre­vi­ous re­ces­sions — fell dur­ing fis­cal 2009, ac­cord­ing to a re­cent re­port by the Rock­e­feller In­sti­tute of Gov­ern­ment, which con­ducts in­de­pen­dent re­search on state and lo­cal gov­ern­ments.

“State-lo­cal gam­bling rev-

enues from lot­ter­ies, casi­nos and ra­ci­nos [which com­bine racing tracks and casi­nos] de­clined by 2.8 per­cent in fis­cal 2009,” the Rock­e­feller In­sti­tute re­ported, not­ing it was “the first such de­cline in at least three decades.”

Pre­lim­i­nary data from 39 states also re­vealed a 2.6 per­cent de­cline in in­come from state lot­ter­ies, which are the largest source of gam­bling rev­enue.

New Hamp­shire, which has nei­ther a state in­come tax nor a state sales tax, be­came the first state to in­sti­tute a state lot­tery in 1964. Now, 42 states de­rive rev­enue from them. To bridge the huge and in­creas­ing gaps be­tween rev­enues and spending, at least 25 states have con­sid­ered ex­pand­ing their gam­bling op­er­a­tions in the past year, the Rock­e­feller In­sti­tute re­ported.

Sev­eral states, in­clud­ing Cal­i­for­nia, North Carolina and Colorado, are con­sid­er­ing broad­en­ing the sales tax to en­com­pass more ser­vices.

Be­tween 1970 and 2007, ser­vices as a share of house­hold con­sump­tion in­creased from 31 per­cent to 45 per­cent, ac­cord­ing to Michael Maze­rov, a se­nior fel­low at the lib­eral-lean­ing Cen­ter on Bud­get and Pol­icy Pri­or­i­ties. Mean­while, the tra­di­tional salestax base — durable goods (such as au­tos, fur­ni­ture ap­pli­ances) and non­durable goods (such as shoes and cloth­ing) — de­clined as a share of house­hold con­sump­tion from 39 per­cent in 1970 to 32 per­cent in 2007.

“Dur­ing the boom years of the 1990s, states had lit­tle in­ter­est in up­dat­ing their sales tax to re­flect the shift to­ward a ser vice-or iented econ­omy,” said Mr. Maze­rov. “Now, sev­eral states are looking at tax­ing more ser­vices, and more may join them if states’ bud­get prob­lems con­tinue.”

Tax­ing ser­vices is a grow­ing trend that has ap­peal to con­ser­va­tives and lib­er­als alike.

“Tar­get­ing ran­dom pop­u­la­tions” — like smokers and drinkers — “is bad tax pol­icy,” said Joshua M. Culling, a state gov­ern­ment af­fairs an­a­lyst at the Na­tional Tax­pay­ers Union, which ad­vo­cates lower taxes and smaller gov­ern­ment. “Sound tax pol­icy is low­er­ing the tax rate and broad­en­ing the tax base.”

Con­cerned that the ap­pli­ca­tion of the re­gres­sive sales tax to more and more ser­vices would dis­pro­por­tion­ately af­fect low-in­come house­holds, Mr. Maze­rov of­fered a so­lu­tion that some con­ser­va­tives could ac­cept. “The sales-tax base ex­pan­sion can be bal­anced with other changes in the tax code, such as a re­duc­tion in the sales-tax rate,” he said.

Mean­while, sin taxes on to­bacco and al­co­hol have been play­ing a ma­jor role in state ef­forts to raise rev­enues, prompt­ing some self-styled health care ad­vo­cates to de­mand that snacks and soda and fatty foods such as meat and cheese should be taxed, as well.

“Ob­vi­ously, it’s nickel-and­dime time,” said Tad DeHaven, a fed­eral and state bud­get an­a­lyst at the lib­er­tar­ian Cato In­sti­tute. “They’re go­ing af­ter the un­pop­u­lar, the less de­fen­si­ble, more vul­ner­a­ble items like cigarettes, cigars and al­co­hol.”

Many sin-tax pro­po­nents cite Colo­nial-era Bri­tish econ­o­mist Adam Smith to jus­tify their rev­enue-rais­ing poli­cies.

“Su­gar, rum and to­bacco are com­modi­ties which are nowhere nec­es­saries of life, which are be­come ob­jects of al­most uni­ver­sal con­sump­tion, and which are there­fore ex­tremely proper sub­jects of tax­a­tion,” Smith wrote in his 1776 cap­i­tal­ist man­i­festo “The Wealth of Na­tions.”

From Jan­uary through Au­gust, 13 states and the District of Columbia in­creased their to­bacco taxes, ac­cord­ing to a tally by Amer­i­cans for Tax Re­form (ATR), a con­ser­va­tive or­ga­ni­za­tion that ad­vo­cates lower taxes and smaller gov­ern­ment.

Rhode Is­land and Con­necti­cut each raised their cig­a­rette taxes by $1 to $3.46 per pack and $3 per pack, re­spec­tively. The cig­a­rette tax in the na­tion’s cap­i­tal jumped 50 cents to $2.50 per pack. Mis­sis­sippi Gov. Ha­ley Bar­bour, a for­mer chair­man of Repub­li­can Na­tional Com­mit­tee and lob­by­ist for to­bacco com­pa­nies, ac­qui­esced to a 50-cent tax in­crease to 68 cents per pack. To help close a $3 bil­lion bud­get gap, Florida Repub­li­can Gov. Char­lie Crist sup­ported in­creas­ing the price of cigarettes. At first, how­ever, he re­fused to ac­knowl­edge that a man­dated price in­crease should be con­sid­ered a tax.

“I’m not par­tic­u­larly fond of any taxes,” Mr. Crist told re­porters in March. “User fees may be a dif­fer­ent item,” he said, pre­sum­ably with a straight face. In the end, Florida tripled its cig­a­rette tax, rais­ing it by $1 per pack.

Even North Carolina, home of To­bacco Road, in­creased its cig­a­rette tax by 10 cents to a rel­a­tively mi­nus­cule 45 cents per pack.

If to­bacco could not es­cape be­ing tar­geted by North Carolina rev­enue rais­ers, it shouldn’t be sur­pris­ing that Ken­tucky bour­bon suf­fered the same fate. Ken­tucky was one of eight states to raise al­co­hol taxes this year, ac­cord­ing to ATR’s tally. Ken­tucky ap­plied the state’s 6 per­cent sales tax to al­co­hol, in­clud­ing bour­bon. (Ken­tucky also joined North Carolina, New Jer­sey and Ver­mont in rais­ing both to­bacco and al­co­hol taxes.)

Al­co­hol taxes have ex­cited Amer­i­can pas­sions lit­er­ally for cen­turies. Fif­teen years af­ter Smith’s clas­sic was pub­lished, the young Amer­i­can gov­ern­ment fol­lowed his ad­vice and im­posed a tax on liquor in 1791 to pay off debt from the Rev­o­lu­tion­ary War. Those taxes caused enough dis­con­tent to trig­ger the Whiskey Re­bel­lion in Penn­syl­va­nia. Pres­i­dent Ge­orge Wash­ing­ton re­sponded by in­vok­ing mar­tial law, sum­mon­ing the militias of sev­eral states, in­clud­ing Penn­syl­va­nia and Vir­ginia, and per­son­ally lead­ing troops into west­ern Penn­syl­va­nia to sup­press the re­bel­lion.

Re­cent al­co­hol tax in­creases have un­leashed their own cross­bor­der ac­tiv­ity. This year, Mas­sachusetts re­voked al­co­hol’s ex­emp­tion from the state sales tax, which it also raised from 5 per­cent to 6.25 per­cent. Al­co­hol taxes were pro­jected to gen­er­ate $79 mil­lion in rev­enue for Mas­sachusetts this year.

Bay State al­co­hol con­sumers im­me­di­ately dis­cov­ered that the long­time price ad­van­tage en­joyed by New Hamp­shire liquor stores sud­denly got big­ger. The bulging price dif­fer­ence en­cour­aged count­less trips to New Hamp­shire, which, thanks to outof-state cus­tomers, tra­di­tion­ally leads the na­tion in per capita hard-liquor sales. Even Mas­sachusetts Demo­cratic state Rep. Michael J. Ro­drigues, who voted for the al­co­hol tax, was pho­tographed re­cently load­ing New Hamp­shire liquor into his car, which is il­le­gal.

“With so many states rush­ing to raise taxes on to­bacco and booze, the levies fre­quently don’t bring in the an­tic­i­pated rev­enues be­cause they drive black-mar­ket sales or be­cause peo­ple cross state bor­ders to buy their cigarettes and booze,” said Mr. DeHaven of Cato.

Al­though cig­a­rette taxes were raised 57 times be­tween 2003 and 2007, the tax in­creases met rev­enue pro­jec­tions only 16 times, ac­cord­ing to Mr. Culling, the state gov­ern­ment af­fairs an­a­lyst at the Na­tional Tax­pay­ers Union.

“Ex­cise tax hikes fre­quently do not bring in the rev­enue, which is of­ten tied to spe­cific pro­grams,” Mr. Culling said. When the rev­enue doesn’t ma­te­ri­al­ize, other more gen­eral tax in­creases are im­posed. That’s one rea­son why non­smok­ers should op­pose cig­a­rette taxes.”

Even if sin taxes do not meet rev­enue pro­jec­tions, they still haul in lot of money. So much, in fact, that leg­is­la­tors are in­creas­ingly lis­ten­ing to health care ad­vo­cates who have in­ten­si­fied their calls for soft-drink taxes and fat taxes.

“The sci­ence base link­ing the con­sump­tion of su­gar-sweet­ened bev­er­ages to the risk of chronic dis­eases is clear,” ac­cord­ing to a pa­per pub­lished re­cently by the New Eng­land Jour­nal of Medicine. “Es­ca­lat­ing health care costs, and the ris­ing bur­den of dis­eases re­lated to poor diet, cre­ate an ur­gent need for so­lu­tions, thus jus­ti­fy­ing gov­ern­ment’s right to re­coup costs.”

The Physi­cians Com­mit­tee for Re­spon­si­ble Medicine raised the soda-tax stakes by de­mand­ing a tax on high-fat, high-choles­terol foods. “Tax­ing so­das and cheese­burg­ers would raise prices at the drive-through win­dow, but Amer­i­cans would get that cash back in the form of lower med­i­cal bills,” said Su­san Levin, the com­mit­tee’s nutri­tion di­rec­tor.


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