SADOW: I Can Live With A Tobacco Tax Hike As Part Of The Tax Swap

A year-plus and change in circumstances can make quite a difference, as Gov. Bobby Jindal appears to admit with his seeming willingness to raise taxes on tobacco. But although it’s a different situation, the basic principles that legitimize this kind of tax remain the same that he should navigate in adopting this policy.

In 2011, Jindal refused to allow any kind of hike like this or otherwise, saying it constituted a tax increase, even if dedicated to salutary purposes. He vetoed the bill that did make it through the Legislature, only to have legislators reshape it as part of a constitutional amendment, bypassing him, and successfully got the electorate (unwisely, because it junked up the Constitution with a petty revenue-raising measure and was tacked onto another unrelated measure) to amend it in.

This year, the Jindal Administration has signaled that it is willing to accept a substantial increase in this tax as part of an overall strategy to eliminate income taxes in favor of consumption taxes. While the unthinking or partisan might call this inconsistent, it is entirely consistent with the Administration’s stated objective that it will not raise taxes and that shifting the composition of the tax burden does not violate this pledge so long as the overall tax burden is forecast to be no higher.

But dealing with an excise tax like tobacco sales, especially with its status as a “sin” tax, requires extra consideration when considering whether it constitutes good policy, regardless of tax pledges. Good taxing policy results when the tax itself is related to the object of the expenditure. Since a general sales and use tax covers a wide variety of activities somewhat related to many government activities ancillary to commerce, it’s good for general government purposes.

However, tobacco taxes are narrowly applied and tied to an activity that society finds less than beneficial (even as it turns out that increased tobacco use probably reduces government costs where it obligates itself to provide health care assistance, because users live shorter and in the aggregate therefore make fewer longer-term demands on health care). This means government should use the proceeds for something more specifically tied to the activity being taxed and recognize that it typically brings in much less revenue that marginal rate changes for taxes not of the “sin” variety (because demand is far more elastic for something that is a luxury of a kind), and that it should be government goal to use this kind of tax as much for its deterrence deliberately trying to suppress its take by its use as a tool to decrease incidence of that behavior as government uses it for a money-raising object.

While there’s been a proposal to tie these revenues specifically to tobacco prevention and cessation and other health care-related expenses, this makes the same mistake as does hundreds of other dedications in the Constitution and statute: it locks in a reasonably predictable revenue flow without any regard to the relative priorities of state needs given its current resources. Better would be dedicating it to general health expenses and let it be allocated to health needs as they change over time. Making it general, as with the sales tax, would decrease its legitimacy as then government would profit off the degradation of users and the inconvenience this causes to others just to fund any activity.

Done this way, higher tobacco taxes work well to achieve laudable objectives under the larger Jindal tax swap plan. They suppress counterproductive behavior, they would funnel money loosely to deal with consequences of that behavior, and they prevent having to divert other monies that can be kept in the hands of the citizenry in a way that encourages investment and productivity, as happens with lower marginal income tax rates. And this applies to all such similar taxes, including those on alcohol and gambling, which the Jindal Administration should make part of the mix – again, keeping the product a best as it can guess revenue neutral. Thus, this tactic needs to be part of the overall strategy on this matter.

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