President Clinton yesterday hailed the budget agreement as a tax cut “for middle class families.” But hidden in the eye-glazing fine print of Congress’s tax bills are selective excise tax increases amounting to $48 billion over the next five years in the House version and $81.3 billion in the Senate version.

Congressional tax writers have yet to announce all the details, but some of the proposed hikes are already well known, such as the proposal to extend for 10 years the tax on air transportation. Under yesterday’s agreement, the tax rate will be reduced from 10% to 7.5%, but a new tax of $2 per domestic flight segment (rising to $3 in 2002) will be imposed. The S6 international departure tax will be raised to $12 and imposed on arriving passengers as well. The federal excise tax on cigarettes will rise by a dime in 2000 and another nickel in 2002, mostly to fund health insurance for children. Meanwhile, the tax writers on the House Ways and Means Committee want to extend the federal tax on vaccines (84 cents per dose) to include the new chicken pox shot.

Because environmental causes are popular at the moment, no one should be surprised to see that imported, recycled halon 1211 (used in portable fire extinguishers) will no longer be exempt from the federal tax on ozone-depleting chemicals, or 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 pre-paid long-distance telephone calling cards, Congress wants to clarify the law to make sure that they are subject to the 3% communications excise tax.


Selective excise taxation is nothing new, of course. It originated in the Middle Ages when, in historian Barbara Tuchmans words, laws were passed “attempting to fix what kinds of clothes people might wear and how much they might spend.” In colonial times, they spurred the Boston Tea Party and the Whiskey Rebellion. Customarily imposed as wartime emergency measures, federal excise taxes nowadays apply to a wide variety of products, including automobiles selling for $30,000 or more, heavy truck tires, gasoline, coal, certain sporting goods (fishing tackle, firearms and shells), telephone service, alcohol and tobacco. State and local governments likewise selectively tax gasoline, alcohol and tobacco products; some have lately slapped levies on soft drinks and “junk food.”

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 consumption of products that offend public virtue. The argument goes like this: Certain consumers must be taxed in order to align private costs more closely with social costs. Such a tax helps curtail the production of what economists call a “negative externality” by forcing individuals to take account of the costs their consumption choices impose on others. Such consequences as drunk driving, secondhand smoke and drive-by shootings therefore justify the selective taxation of alcohol, tobacco and firearms, respectively.

Supporters of higher taxes trot out studies reporting substantial workplace productivity losses and extra demands on health-care resources due to smoking and drinking. But these estimates are typically biased upward by erroneously counting private costs as social costs. Consider productivity losses. If in fact alcohol and tobacco consumers are less productive than their abstemious colleagues, then they themselves will bear the costs. After all, lower productivity translates into smaller wage increases, less attractive job assignments and slower rates of career advancement. At the extreme, employees who are unable to perform their duties satisfactorily for any reason, including alcohol and tobacco use, will lose their jobs. If smokers or drinkers produce less, they will earn less. There is no externality left to internalize.

Even if there are some remaining costs that aren’t internalized, it does not follow that new (or higher) taxes are justified. Excise taxes penalize all the consumers of a product, not just abusers. If one wants to reduce drunk driving, for instance, it would be far fairer to increase the penalties for that offense rather than the taxes paid by responsible drinkers.


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 in correcting externalities cost-effectively. Government’s objectives are self-interested and shortsighted: raise the most revenue at the lowest political cost. Terms like “user fee” 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.