Kansas Gov. Sam Brownback has put his state in a bit of a pickle. The governor pushed through massive cuts to the state’s income taxes, which, in one of the least surprising developments in recent U.S. history, left the state hundreds of millions of dollars in the hole. Even the conservative citizenry of Kansas was not pleased, and Brownback barely squeaked to a re-election victory. Now he’s finally having to do something to close the budget gap, and the answer is: sin taxes. Levies on alcohol and cigarettes will rise substantially.
Some corners of the progressive movement will rejoice at this. Alcohol and cigarette taxes reduce consumption of substances that prove very unhealthy for a lot of their consumers. Whatever your position on the paternalism of cigarette taxes, I think it’s fair to say that they have contributed to the decline in smoking, and they are probably most effective at deterring new smokers, who tend to be kids without all that much disposable income. Alcohol taxes, meanwhile, make it very expensive to get drunk, as opposed to having a couple of drinks.
On the other hand, these taxes are also regressive, which makes a lot of progressives unhappy; I started the day with an email from a progressive reader who was making just that point. Liberal advocates of sin taxes want to use them to cut consumption of dangerous substances, not to deliver an income tax cut to the wealthier precincts of the socioeconomic spectrum.
That’s not an argument we’re going to settle here today. On the other hand, I think there is something we can settle: why states rely so much on regressive taxes such as sales taxes, sin taxes and property taxes rather than a progressive income tax. There’s not one simple reason they do so, of course, and ideology does play into it. But there are practical reasons, as well, which seem worth exploring:
1. Consumption taxes are economically efficient.
When you tax something, you get less of it. That’s simply inherently true of any tax. However, the distortions are not equal across taxes, so good tax policy will try to lean on taxes that introduce the least harmful distortions.
In the case of sin taxes, some of the distortions might actually be positive — less cancer and drunken driving, for example. But even when that is not the case, we still might consider some distortions better than others. For example, income taxes discourage not only work, but also saving, because they raise the “price” of saving. Every saving decision is ultimately a decision whether to forgo saving now in order to increase your future consumption. Taxing the earnings on savings means that you have to save more now in order to consume a given amount later — and since most people prefer a bird in the hand to two in the bush, some people will say “to hell with it, I’d rather just enjoy spending it now.” That makes us all poorer in the future.
Consumption taxes don’t introduce this sort of temporal distortion; as long as the tax is roughly stable, it raises the price of current consumption and future consumption by the same amount. This is why economists like them, and why most developed countries have a value-added tax.
2. Income tax revenue is exceptionally volatile.
Say you get laid off and don’t work for a year. Your income tax liability will probably be zero. But it’s unlikely that you will have gone a full year without eating. That’s why income taxes plummeted further during the Great Recession than other state tax sources. For state and local governments, which can’t borrow money as easily as the federal government can and have difficulty trimming their payrolls in down markets, this is a major drawback.
3. Sales and property taxes let you collect from nonresidents.
People — especially rich people — can remove themselves, and all their lovely, lovely taxable earnings, from your jurisdiction, at which point your income tax collections drop to zero. But if they want a pied-a-terre in your area, they’re still going to be paying property taxes. If they decide to stay in a hotel instead, they’ll be paying hotel tax, sales tax and (indirectly) the property taxes on the hotel. They’ll also pay sales tax on any restaurant meals they consume, movies they see or groceries they buy. Yes, some of your residents will be able to save some sales tax from out-of-state firms that don’t have a “nexus” (aka a physical location) in your state. But this is really only a factor on big-ticket purchases. People are not going to order their manicures or a gallon of milk from Amazon.
4. Sales and property taxes are (relatively) simple to administer.
Oh, people are going to fight about the assessments, of course. But ultimately, there’s not that much to argue about. Is that your house? Is it sitting on this lot we have identified? Is this your name on the deed? People can’t hide their house and claim it was stolen. Nor is there all that much argument about sales tax items, unless you try to cram too many exemptions into your tax scheme. Did you sell something? How much did you sell it for? OK, well, 8 percent, please. By contrast, taxing income, and especially business income, involves zillions of pages worth of regulations and court decisions to specify what, exactly, constitutes income — and no, there isn’t some simple way to “close the loopholes” and do away with these arguments.
States have largely dealt with this by piggybacking in various ways on the federal government, which has a lot more administrative capacity, but that is also limiting in various ways.
These are four reasons — other than “we hate the poor” — that states might choose to rely more heavily on sales taxes. For that matter, it’s why European governments rely so heavily on the VAT: It efficiently collects a hell of a lot of revenue with less distortion or administrative overhead than income taxes do. Lacking a VAT, America’s tax system is actually comparatively progressive, in that it collects a larger share of its revenue from the wealthy than many other places do. Our system is less progressive because we transfer less money to lower-income groups, not because our tax code is stacked in favor of the wealthy.
If progressives get their dream of a more generous welfare state, it will probably go hand-in-hand with a more regressive tax system.