I used to think that the government should tax things uniformly to avoid distortions in the market. This was my economic-libertarian side, and I strongly prefer consumption taxes to taxes on income or property. I oppose property taxes on the grounds they undermine property rights. I oppose income taxes because they also undermine property rights by asserting a right to a person's income.
So when discussions in State politics turned to funding highway improvements and the two proposals were either raising a gas tax or raising a cigarette tax, I opposed both ideas on the ground that they were excise taxes. Excise taxes are taxes on particular items when purchased. They are a form of consumption tax, but narrowly tailored to a particular item.
I was particularly opposed to the cigarette tax because it would be born mostly by poor people. Smokers are lower median income than non-smokers by a significant amount. My thinking was that this particular excise tax would mostly harm the poor and, being an excise tax, introduce some market distortions.
I think a lot about the role of government and its relations to law and economics, because I think it is particularly consequential. Further reflection yielded a new insight: the rule of law gives government the right to allocate societal values, and it is therefore perfectly consistent for those value judgments to be reflected in the tax code.
Right now, the government has "distorted the market" for all kinds of items: illicit drugs, certain kinds of firearms, and a huge array of prohibited activities and items. By Prohibition, the government has done the act that bounds the most extreme end of the government punish/subsidize spectrum. (in a sense; once criminalized, one could say there is another spectrum of severity of criminal punishment and enforcement).
Why can it do this? It does this because we the people have decided there is a compelling state interest in discouraging illicit drug use (for example) and so it is prohibited, and Courts have ruled it is within the Constitutional scope of government to do so.
But I have some reservations. Here are some of the good and bad I see as likely outcomes:
- An especially high rate of tobacco taxation is likely to invite a black market in tobacco products from states with lower rates of taxation. Other states with high tobacco taxes have already seen this, and it creates a major enforcement problem trying to determine the tax-origin of a particular cigarette. I don't like laws or policies that are difficult to enforce. All this can be avoided if the rate of taxation is set to a level comparable to neighboring states, such that smuggling or any other form of arbitrage is not cost-effective.
- So the tax may fall most heavily on poorer people. Is this a bad thing? Higher cost is often cited as a reason to stop smoking. So one potential upshot is that people might be induced to stop smoking. Or not start. A poor person is likely receiving significant subsidy for medical expenses, so that person being healthier ends up saving taxpayer dollars on medical care. Or so goes the reasoning. This article suggests that common vices should actually be subsidized because people die faster and actually end up costing less to care for. Such is the sickeningly perverse incentives of a welfare state with socialized medicine like the NHS in the UK.
- Since taxation yields money, and money is fungible, every dollar raised by one form of taxation is a dollar not needing to be taken from somewhere else. I'd like to think a little Pareto Principle here might be appropriate.
- The problem with all excise taxes is that they invite lobbying as taxation and subsidy are the the ways that government picks winners and losers in the market.
So the takeaway is this: I think there is an argument to make for a "sin" tax on the consumption of certain goods that are luxuries or known to have public costs. A flat consumption tax, while facially neutral, ignores the fact that all consumption is NOT neutral in terms of personal and especially public cost.
For example, if local air quality becomes a problem, would it not be appropriate to tax consumption that most directly contributes to poor air quality? I would think so.
After all, even Uncle Miltie supported the idea of a tax if net externalities were truly negative. (which may not even be true for tobacco).