The poor need help, not hidden taxes

Taxes on cigarettes and liquor hit poor people harder than the rich, but the 'voluntary tax' of state lotteries hits them hardest of all.

from the July 9, 2007 edition

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Critics say sin taxes are a poor way to boost revenues.

For instance, Senator Smith's proposed hike in federal cigarette taxes – from 39 cents to $1 a pack – would transfer wealth from smokers to non-smokers, says Patrick Fleenor, chief economist of the conservative Tax Foundation. And since the poor are more likely to smoke, the tax would fall most heavily on them.

In general, though, raising the price of cigarettes tends to trim consumption, especially among young people. But, Mr. Fleenor says, the proportion of Americans who smoke has remained at about 20 percent since the 1990s for two basic reasons: (1.) Hard-core smokers find it difficult to give up their addiction; and (2.) Although the tax on cigarettes has increased greatly (state taxes now average about $1 a pack, and the cigarettemakers' legal settlement of 1998 boosted cigarette prices significantly), the average cost of a pack of cigarettes has been eased by a massive rise in smuggling.

The world price for cigarettes is about $1.25 a pack. The US price, with taxes, runs about $4. So, Fleenor says, cigarette bootleggers work the streets of New York like drug dealers. Thieves may rob convenience stores of cigarettes, not bothering with the cash. Smokers buy tax-free cigarettes, hundreds of millions of packs of them, from military bases, Indian reservations, and over the Internet.

Fleenor says a general hike in the federal income tax would be a fairer way to provide revenues for broader health insurance coverage.

Gambling is another area where the poor tend to get soaked. Most of them may not realize that state lotteries are in effect a form of voluntary taxation, says Mr. Davis, lead author of a new 61-page NCPA study on how sin taxes hit the poor hard. The report notes that people in the lowest-earning one-fifth of the population (those making an average of $9,168 a year) spend on average 31.1 percent of their incomes on alcohol, tobacco, utilities, and gasoline – all of which are subject to excise taxes. The highest earners spend just 6 percent of their income on the same items. So these excise taxes are "regressive," weighing down the poor more than the well-to-do.

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