blank.gif (51 bytes) Features

Sin Tax Error

by D. Dowd Muska

hen Nevada’s legislators leave Carson City on May 31st, they’ll do so without having raised taxes on tobacco. They’ll also close up shop without having hiked the state’s alcohol tax. Much to the chagrin of public health advocates—and in defiance of the national trend—1999 will be yet another legislative year in which Nevada’s levies on booze and smokes are left right where they are.

Perhaps it’s due to the state’s libertarian legacy. Clearly it has much to do with the raw political muscle of casino interests. And as a state filled with hard-drinking, heavy-smoking residents and tourists, Nevada’s caution-to-the-wind health habits certainly play a role. Yet whatever the combination of factors, sin taxes are wholly unwelcome in the Silver State. Polls show Nevadans support increased liquor and cigarette taxes. However, for 20 years legislators have consistently refused to increase the alcohol tax. In sharp contrast to the tiresome charge that casino lobbying is the sole reason for these defeats, a signature drive to place the "nickel a drink" tax back in legislators’ hands tanked last November. As for tobacco, Nevada’s per-pack cigarette tax is a mere 35 cents—a penny below the U.S. median. And despite state tobacco paranoiacs’ reported push to raise the tax, Governor Guinn’s popular no-new-taxes pledge put the kibosh on any attempt this session.

Outside of the state, collusion between elected officials and public health advocates has resulted in significant hikes in sin taxes. "Even those citizens who keep informed about local and national affairs underestimate the frequency with which taxes are selectively imposed to restrict the range of voluntary choice and to reward special-interest groups," writes Independent Institute Research Fellow William F. Shughart II. More than at any other time in history, sin taxes are seen as means to discourage—or even eradicate—uncouth habits, while at the same time provide funds for nannies’ finger-wagging programs. Of course, enough people have to keep sinning in order to ensure a steady stream of the revenue for anti-sin campaigns, but not many see the irony in that.

In short, sin taxes are now the tool of choice for social engineers. The desire of President Clinton and many in Congress to soak smokers need hardly be mentioned. Senator Strom Thurmond is currently pushing for a hike in the federal levy on alcohol. There’s now talk of a fat tax to fund nutritional and exercise programs—it’s not widely known, but several states and municipalities already place extra levies on soda and junk food. Kelly Brownell, director of Yale’s Center for Eating and Weight Disorders, is leading the call for a national "twinkie tax"—a proposal hailed by U.S. News & World Report as one of 16 "smart ideas to fix the world."

"To me," Brownell once said, "there is no difference between Ronald McDonald and Joe Camel."

Eager to exploit sin tax mania, last year Friends of the Earth boasted of a national poll that showed widespread support for "green taxes" aimed at punishing the producers of fossil fuels. And the possible imposition of one new sin tax is of particular interest to Nevada: As the number of gambling critics rises, the likelihood of a federal casino tax grows.

But while crusades against the demon weed and the devil’s water—not to mention super-size fries, the internal combustion engine and video poker—continue to make headway across the nation, Nevada is standing pat. The political establishment’s refusal to raise taxes on drinkers and smokers is a happy exception to the state’s tax-and-spend habit of the last two decades. But whether legislators and the governor know it or not, their stance also means the state will avoid the undesirable spin-off effects of taxing sin. Even better, Nevada is reaping the benefits of a neighbor’s sin tax foolishness.

The Silver State’s relatively low levy on tobacco is currently demonstrating one of the many false assumptions about sin taxes: the belief that when a dirty habit is made more expensive, people will automatically give it up.

It all started with Meathead. Last year, liberal director and All in the Family alum Rob Reiner successfully lobbied for an initiative which increased California’s cigarette tax by 50 cents. New revenue from the tax—and Meathead and his fellow activists assume there will be plenty—is earmarked for early childhood development programs.

As those who grasp the law of unintended consequences could have predicted, every Golden State puffer is not willing to shell out more for the right to light up. Many who live close to Nevada are purchasing their cigarettes in a state with a more forgiving tobacco tax. In January the Reno Gazette-Journal reported that Nevada retailers along the border have seen cigarette sales boom.

"I saved $6.00 per carton," said Californian Michelle Gatlin, who stocked up at the Gold Ranch Casino in Verdi. "I’ll be back in a couple of weeks." Charlene Murphy, manager of the Washoe Tribe Smoke Shop, told the Gazette-Journal that 10-carton sales were common at her store, and some customers even bought "pipe and cigarette tobacco to roll their own." Californians’ run for the border well illustrates the fact that smokers are willing to go to great effort to keep their habit. (One wonders if supporters of the pollution tax are upset that additional greenhouse gases result from smokers’ longer cigarette runs.) Michigan raised its cigarette tax by 50 cents in 1994. Soon after, taxable sales of cigarettes in the Wolverine State fell by 21 percent, while sales in neighboring states rose—confirming economist Richard Vedder’s hypothesis: "State governments often do not raise the money they initially expect to when they raise excise taxes, simply because they underestimate the cross-border phenomenon." Alaska and Hawaii have learned this lesson—the per-pack tax in these remote states is $1.00.

But Meathead’s initiative is likely to have additional, and more sinister, spin-off effects than mere border jumping. Wherever they are adopted—Canada, Australia, the United Kingdom, Romania, China—draconian tobacco taxes lead to widespread smuggling. Smuggled hooch is a big business, but tobacco is lighter, and thus easier to transport. About a quarter of the planet’s cigarette purchases are now made on the black market. Organized crime’s infrastructure can quickly adapt to a new product (Italy’s mob bosses generate about half a billion dollars in revenue from cigarette smuggling), and independent operators seize the opportunity as well.

California was already experiencing cigarette smuggling before Meathead’s initiative, and the problem is likely to get much worse now. As columnist Vin Suprynowicz noted in April, four hooded men recently pulled off a $1 million cigarette heist in Corona. Sgt. Eddie Garcia said that if the booty isn’t sold in another state, it might be headed for "L.A., where they’ll be sold on the black market."

Those who live in constant fear that somewhere, someone is smoking downplay the smuggling and border-jumping problems, insisting that it’s all worth it—for the children. Yet there’s very little evidence that raising the tobacco tax reduces underage smoking. In fact, doing so may allow teens to exert less effort to look cool. Canada found that the thriving black market generated by its tax hikes made it easier for underage smokers to get their nicotine fixes—no more shoplifting, no more fake IDs, no more waiting round in parking lots for someone’s older brother. The tax increases imposed by so many American states in the past few years have not cut smoking either. Tobacco use by high school students, according to the Centers for Disease Control and Prevention, rose by almost a third between 1991 and 1997.

If sin taxes don’t directly deter sin, many public health advocates say, what revenue they do generate can be used for subtle persuasion. That’s the motivation behind the recent attempts to raise Nevada’s modest alcohol tax. During 1997’s legislative session, Bernie Anderson authored a bill which would have sent the cost of liquor in Nevada soaring. The roly-poly Sparks assemblyman’s AB 92 raised taxes on beer by 312 percent, wine by 267 percent and hard liquor by 208 percent. The projected annual revenue from the hikes, $51 million, would be devoted to rehab projects, as well as anti-alcohol programs in schools and—get this—prisons. Predictably, Nevada’s public health establishment lined up behind Anderson’s bill.

"Looting another $51 million from the already beleaguered taxpayers to further empower the bureaucracy," the Las Vegas Review-Journal editorialized, "without concurrent tax cuts elsewhere, has real negative consequences—for restaurants, gaming establishments, retail outlets, taverns, residents and the Nevada economy as a whole."

That logic—combined with the pressure applied by uber-lobbyist Harvey Whittemore—sent AB 92 down in flames. It was now up to activists to keep the "nickel a drink" tax alive, in the form of a petition drive to require legislators’ consideration in the 1999 session.

But despite what the polls indicate, Nevadans didn’t rush to sign up. Last November Brenda Mendiola, a Las Vegas substance abuse counselor who organized the effort, admitted that signatures were hard to come by: "We didn’t get a lot of support this time around."

As well-intentioned as Mendiola and her ilk may be, their desire to tax all drinkers in order to address the problems caused by a few drinkers is another pernicious aspect of the sin tax movement. As economist Thomas J. DiLorenzo puts it, "Once it becomes ‘legitimate’ for government to protect individuals from their own follies, there is no way to establish limits to governmental power." That’s fine by many in the public health establishment, who these days seem more interested in battling free will than disease. But to many, it’s a dangerous harbinger of an ever-expanding Nanny State.

One final point about sin taxes: They hurt the poor. According to Americans for Tax Reform, federal and state excise taxes already account for about 75 percent of the price of cigarettes, 60 percent of the cost of distilled spirits and 20 of the cost of beer. And since lower-income citizens tend to smoke and drink more than the affluent, tax hikes on liquor and tobacco are inherently regressive. Take cigarettes. As the Cato Institute’s Robert Levy recently observed, "more than half of any [tobacco] price increases will be paid by smokers with annual incomes under $30,000; only 1 percent will be paid by smokers earning more than $100,000."

It’s difficult to find a big-government scheme built on flimsier intellectual ground than the sin tax movement—and as a result, its bitter fruit is undeniable. Making smoking and drinking more expensive seldom deters abusers, does not reduce underage use and fails to generate projected tax revenue. Sin taxes discriminate against the poor, encourage smuggling and legitimize the notion that nagging is a proper function of government.

Happily, the Silver State remains a rare bastion of sanity on sin taxes—eschewing the hikes public health advocates so desperately crave. At least for smokers and drinkers, Nevada is a low-tax state after all. NJ

D. Dowd Muska (ddm@npri.org) is a contributing editor of Nevada Journal.

News to Use
Taxing Choice: The Predatory Politics of Fiscal Discrimination. Edited by William F. Shughart II, The Independent Institute, 1997.
The Food and Drink Police: America's Nannies, Busybodies, & Petty Tyrants, by James T. Bennett, Thomas J. DiLorenzo, Transaction Publishers, 1999.
D. Dowd Muska
ddm@npri.org

Join NPRI

Journal front | Search | Comment | Sponsors