Finding the Blame for What Ails You

by Lowell L. Kalapa, Tax Foundation of Hawaii

Lawmakers seem to have a simplistic reaction to solving problems the solution to which plagues their constituents - tax it.

Probably the best example is what people like to call sin taxes, those excise taxes that are levied on tobacco and alcohol products. After all, smoking causes cancer and alcohol causes all sorts of problems including driving under the influence. Lawmakers and community advocates shake their heads and push for higher tax rates, arguing that making these products more expensive will deter folks from using these products.

The problem is that lawmakers also like the revenues that are generated from the sales of these products and, in some cases, they have tried to link the use and sale of these products with noble causes such as the funding of the Cancer Research Center that is currently being built. Again, the argument is that smokers should pay for programs and projects which seek to cure the related ill which in this case is cancer caused by smoking.

The irony is that arguments to increase the tax on tobacco and, more specifically, cigarettes, is a goal of getting smokers to quit while depending on the revenues from tobacco and cigarette taxes to fund an ongoing program, in this case the Cancer Research Center. So, which is it folks, stop smokers from smoking and if successful, there won’t be any revenues to fund the Cancer Research Center?

The fact of the matter is that it appears that both locally and nationally, higher taxes on cigarettes is having an effect on smokers as, for the first time, tax collections on the sale of cigarettes have fallen below the previous year’s tax collections. Certainly some of the decline is due to smokers actually quitting, but to some degree one has to suspect that some purchases were made via mail order from exempt Indian reservation outlets while others may be what is called gray market purchases, that is from sources outside the country.

What should come as a surprise is that most of the folks who have quit are of some means as they are more likely to recognize the health hazard caused by use of this product. That means most of those who are still smoking are among the lower-income members of our community. Thus, the tax is regressive, generating less and less collections from middle and higher-income individuals.

A similar phenomenon has become increasingly apparent in Hawaii with respect to alcohol sales. Anyone who is familiar with the sale of alcoholic beverages will acknowledge the fortunes of the alcoholic beverage industry in Hawaii is highly dependent on the visitor count as the volume far exceeds the capacity of the resident population=s per capita consumption. And there is data that correlates the volume of consumption rising and falling with the visitor count. As the cost of this product rises, either because of natural product increases or a rise in the excise tax imposed on this product, it will affect the volume of sales or as has been reported in recent years, visitors - especially those who stay for extended periods of time like those in time share units - tend to buy this product at discount stores in volume, consume what they wish while here and then on the way to the airport to leave, return the unused bottles for a refund.

Funny as it may sound, it is no laughing matter for restaurants and bars that cater to visitors. Because of overhead and insurance costs and usually paying a percentage of gross sales as part of a lease, these on-premise consumption businesses have seen a decline in traffic. With the decline in traffic and volume of sales, it is the wait help that suffers the layoffs when business is bad. Thus, one of the consequences of rising taxes on alcoholic beverages is that it again affects those who are paid the least. Again, a form of a regressive tax.

With the upcoming session, lawmakers will again, no doubt, seek to raise or impose new taxes to “curb” some sort of bad behavior. Probably the one that has already been floated in the past and will, no doubt, be put on the table again is a tax on soda because as advocates argue, consumption of sugary drinks contributes to obesity. Before lawmakers make a hasty decision, they need to sit down and analyze what really contributes to obesity, especially childhood obesity. They may want to think that sugary drinks contribute to overweight kids, but then one has to stop and think that it is only one of the contributors.

As has been pointed out many times before, this generation of youngsters is no longer as active as those twenty or so years older than they are, a generation that did not have Ipods and Iphones and did not know anything about texting and tweeting. If lawmakers think taxing something heavily can solve some of our problems, then perhaps there should be a special tax on such devices.

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