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Commentary

In Extreme Excess: The Budget “Deal” That Really Isn’t- No Matter What the Politicians Say


     
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As congressional tax writers continue to congratulate themselves for the capital gains tax cuts and educational tax credits in July’s celebrated budget agreement, taxpayers should force them to justify the nearly $60 billion of excise tax hikes hidden in the legislation’s fine print.

In 1932, Franklin Roosevelt campaigned on a platform to repeal Prohibition. A commentator at the time said that, if only given the chance, Americans might drink themselves into a balanced budget. In 1997, President Clinton and the tax writers in Congress are hoping that Americans will “smoke and fly” the budget into balance by 2002.

With the tobacco industry on the ropes, those two strange political bedfellows, Sens. Orrin Hatch (R-Utah) and Edward Kennedy (D-Mass.), succeeded in increasing the federal excise tax on cigarettes from 24 cents per pack to 34 cents per pack in 2000, and by another nickel in 2002. The bulk of the proceeds---projected to amount to $24 billion over five years- will be distributed in block grants to the states to help flund health insurance for children. On the other hand, that health care will be a bit more expensive because the federal tax on vaccines (about 84 cents per dose) was extended to include your kid’s chicken pox shot.

Air travel gets hit hard with new taxes too--amounting to about $34 billion over five years. Yes. Congress has reduced the air transportation tax rate (from 10 percent to 7.5 percent). But it has also added a new tax of $2 per domestic flight leg (rising Ii) $3 in 21.5)2). It also raised the international departure tax to $12 per passenger and imposed taxes on arriving passengers–effectively quadrupling the tax. Frequent-filer awards will get taxed, too.

Because environmental causes are popular at the moment, no one should be surprised to see that the pre-1996 tax of 0.1 cent per gallon on gasoline and other fuels will be extended to plug the federal government’s Leaking Underground Storage Tank Trust Fund. Nor should anyone be surprised that with the proliferation of prepaid long-distance telephone calling cards. Congress acted to make sure that they are subject to the 3 percent communications excise tax.

Selective excise taxation is nothing new, of course. In colonial times, it spurred the Boston Tea Party and the Whiskey Rebellion. What is new is the extent to which politicians have attempted to pass off plain and simple tax increases as “user fees” or as “corrective taxes” designed to reduce the production of harmful spillover effects–what economists call a “negative externality”–by forcing people to take account of the costs their consumption choices impose on others. Such consequences as drunk driving, secondhand smoke and drive-by shootings therefore allegedly justify the selective taxation of alcohol, tobacco and firearms, respectively.

Excise taxes are often touted by politicians, bureaucrats and economists as efficient tools for reducing undesirable behavior. But in reality they are highly inefficient because they penalize equally both the responsible and irresponsible consumers of the taxed product.

For example, a tax on alcohol intended to force consumers to take account of the “social costs” of drunk driving punishes the many innocent individuals who drink in moderation for the damages caused by the dipsomaniac few. Alternative policies, such as imposing stiffer legal penalties on drunk drivers and securing compensatory restitution for their victims, are far more effective and need not result in unfair discrimination.

For all the neo-Puritan talk of virtue, government never loses sight of revenue. Alcohol and tobacco taxes contribute billions of dollars to public treasuries that cannot easily be replaced. The government’s appetite for revenue causes the goal of discouraging consumption to lose its appeal. Indeed, government is not above promoting sin to raise revenue–look at all the states that have legalized gambling. The proponents of increasing taxes on politically incorrect products are therefore placed in the position of arguing that such taxes will help reduce the consumption of these products–but not by too much.

Government has no interest in designing an efficient tax system, setting optimal user fees, or correcting externalities cost-effectively. Government’s objectives are self-interested and short-sighted: raise the most revenue at the lowest political cost. Terms like “user charge” and “corrective tax” are no more than pretexts for raising revenue. In ways that would otherwise be seen for what they are–highly discriminatory and regressive taxes.


William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.


  New from William F. Shughart II!
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation?






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