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While bombs continued to burst in air far away, a proposal in the Nebraska Legislature to add a buck to a single pack of cigarettes went up in a cloud of filibustered smoke last week. The bill, LB 1124, failed to reach the magic number of 33 — the Unicameral’s numerical benchmark at which a cloture motion passes and a filibuster is, well, busted.
Senators are scrambling to find enough money to cover a $140 million deficit in the state’s budget, which, by law, must be balanced before they put out the cat and leave the Capitol on April 17.
Any debate on a “sin tax,” calls to mind the maxim that “you can’t legislate morality.” That’s because some still see smoking, drinking and gambling as moral issues, not simply behavior that can generate money for governments strapped for cash.
The undoing of LB 1124 was typical of the undoing of most sin taxes when they are called on to produce tax receipts for government entities. The argument goes that tax increases on smokes, booze, gambling, even drinks high in sugar are regressive because their impact is greater on lower-income citizens.
There’s also the behavior modification piece. A sin tax is Pigovian Tax — not just a pretty name. Pigovian taxes aim to change how we act because they target those things that negatively impact society such as smoking on the general health of the population. Aside from filling government coffers, legislators cranking up the cost of these products also hope to modify the conduct of those who use them.
The results are uneven. Research reveals a couple things: Considerable tax dollars can be raised in a short time when smoking, imbibing and gambling cost more, and fewer of us smoke, imbibe and gamble when they do. That makes sin taxes a popular ploy to plug budget holes or to produce a pile of needed cash.
Nevertheless, in addition to being regressive, the questionable staying power of these taxes makes them unreliable in the long term or as a permanent fiscal policy.
Then there is the conundrum. Or paradox if you prefer. If part of the reason we tax a vice is to reduce how many participate in it and the calculus works, we have also reduced the amount of money the tax generates, an incongruity in Arthur Cecil Pigou’s thesis. When raising taxes reduces consumption, returns on the tax diminish.
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We also have some irony. Taxing gambling as part of a sin tax policy yet sponsoring it at the same time is an argument the 45 states that sanction lotteries must square. Sure, some of the proceeds go to combat gambling addictions, but the presence of both a sin tax and lottery ticket conjure at least some incongruity.
None of this is new. After Alexander Hamilton became the nation’s first Secretary of the Treasury, he was faced with devising a way for the new country to pay its war debts. The “Excise Whiskey Tax,” which levied taxes on the manufacture of whiskey, passed Congress in 1791. Hamilton and Congress both failed to recognize that grain farmers — especially those in western Pennsylvania, the edge of the U.S. then — relied on whiskey for their livelihoods because they both grew grains and distilled the liquor themselves.
Local militias near there formed to fight the tax, and after a mob torched a local tax collector’s home and set off for Pittsburgh, the “Whiskey Rebellion” was fully formed. When President George Washington sent 13,000 troops to quell the uprising, the revolt fell apart and its adherents fled. Only two of the rebels were one day convicted of treason although Washington later pardoned the pair.
While no such insurgence of smokers, drinkers, gamblers or soda pop junkies seems on the Nebraska horizon, as of this writing, neither does a solution to the shortfall in the state budget. With the cigarette tax bump no longer viable, the good news is that senators recognize — even in the face of some serious red ink at this late hour — that solving tax problems might require some serious outside-the-tax-box thinking.
Where those ideas end up is anyone’s guess — be it furloughs for state employees and pausing incremental income tax reductions already legislated are among some ideas being floated.
Here’s what we do know: We wouldn’t call the budget deficit problem an old friend, but the Nebraska Legislature has been here before. That said, solving it with an old idea — such as sin taxes — may not work.
In other words, the space outside the box might need to be new territory altogether.
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