Washington Booze Taxes: A Little Bit Lower

On June 30, 2007, the state excise tax on liquor sales will be a little bit lower. A temporary tax of 42 cents per liter expires at the end of this biennium. The temporary tax, which brought in just under $10 million a year, is peanuts in the grand scheme of things: in fiscal year 2004, Washington collected about $190 million in alcoholic beverage taxes.

And state taxes are only part of the picture. Washington is one of less than 20 states that are "control states," meaning the state government is in charge of selling alcohol to consumers. Control states typically charge consumer not just a state excise tax, but also a "markup" that takes the place of the profit-seeking markup on booze purchases in non-control states. The $190 million in excise taxes for FY04 is dwarfed by the $400 million or so in "markup" revenues the state collected that year. (Although it's unfair to think of the entire $400 million markup as a government "tax"; some, if not all, of that markup would end up as profit for liquor store owners if Washington allowed private companies to sell liquor.)

Why worry about this? For starters, liquor taxes are regressive, hitting low-income Washington consumers much harder, as a share of income, than middle- and upper-income families. To be sure, alcohol taxes, like cigarette taxes, serve a social function, helping to reduce consumption of the taxed item. But for those who still choose to imbibe, it's the low-income drinkers who will be hit hardest.

And most observers of Washington's historical tax policy debates will suspect that the real reason why Washington relies so heavily on alcohol taxes-- and has chosen to balance its budget in recent years through temporary tax hikes on alcohol like the one scheduled to expire on June 30-- is because lawmakers have refused to discuss bringing the tax system into the 21st century by introducing a broad-based personal income tax. From this perspective, the expiration of this $10 million excise is a good thing simply because gives policymakers a chance to get this choice right the next time the economy slows down, and enact tax hikes based on the defensible principle of "ability to pay" rather than the indefensible principle of "screw the poor."

Tobacco Lobbyists Take Aim at Snuff Tax

If you don't know exactly what "snuff" is, you're probably a happier person for it. It's a form of non-cigarette tobacco product that (apparently) the kids in Washington State just love. And state lawmakers have heard plenty this spring about how snuff ought to be taxed.

The issue: right now, Washington taxes snuff based on its value. Any non-cigarette tobacco product faces a Washington State tax equal to 75 percent of its value. The problem with this, according to lobbyists for the fancier brands of snuff, is that it amounts to a "tax subsidy" for cheap snuff. If you buy snuff that costs (making this up) $1.00, the tax on snuff is 75 cents. But if you buy snuff that costs $2.00, the tax is double that-- $1.50. Therefore, the lobbyists say, the current tax structure gives snuff consumers an incentive to buy the cheap stuff. The alternative, as proposed in SB 6092, is to impose the same $1.88 tax on each ounce of snuff sold. So the cheapest and swankiest snuff would face basically the same tax.

The only problem with this is that value-based taxes are a pretty good idea-- and economists routinely point out the shortcomings of per-unit taxes like the one SB 6092 would impose. The main problem is that collections from a per-unit tax will only increase when consumption increases. And if current smoking trends are any indicator, snuff consumption is probably not gonna increase any time soon.

Value-based taxes, on the other hand, automatically grow with prices and with the economy. So as snuff prices grow with inflation, state revenues from the current snuff tax will grow too. From a revenue perspective, then, the proposed tax shift seems like a bad deal in the long run.

From a prevention standpoint (usually just as important on tobacco tax issues), it's hard to know what the impact would be. A tax change that make low-quality snuff more expensive and high-quality snuff less expensive will definitely make people less likely to use the lousy stuff. But it's hard to know whether it will discourage snuff consumption in the aggregate. A lot probably depends on whether underage kids (always the target population for prevention efforts) tend to use the cheap stuff or the expensive stuff.

But this sure sounds like a sop to lobbyists for the high-end snuff-makers. It means more tax will be paid on cheap snuff, and less tax will be paid on the good stuff. One guy offering testimony described it aptly:

T.K. Bentler of the Washington Association of Neighborhood Stores said the proposal was no different than shifting the tax burden on a $1 million house to someone with a $250,000 home. “It just doesn’t make sense from a policy perspective why you want to shift that burden,” Bentler said.

Car Tax Lessons for Washington?

No tax has been more vilified in Washington than the late, great "car tax." So it's interesting to see a form of car tax being floated as a local revenue-raising option in Indiana.

The developing debate over how Indiana local governments ought to be funded has centered, so far, on the local property tax and the conditions under which locals should be allowed to levy income taxes to pay for property tax cuts. But there's a new game in town: Rep. Chet Dobis suggests allowing local governments in northwestern Indiana the option of levying a "wheel tax" of up to $50 per vehicle to pay for an expanded commuter rail system.

As a fellow Dem, Rep. Linda Lawson, helpfully points out, the car tax "is one of the most hated taxes... the people in my community... would be just outraged if we gave them another tax." And that certainly seems to be true wherever you look. Opposition to the car tax almost single-handedly got former Virginia Governor Jim Gilmore elected and helped to give California Governor Gray Davis the boot. And if Connecticut voters aren't currently buying Governor Jodi Rell's plan to repeal that state's car tax, it's not because they like paying taxes on their cars.

But that's not, in itself, a sufficient reason to deny the car tax a place in a state's revenue system. Anti-tax sentiment is easy to channel, and the ease with which the car tax can be vilified is at least partially due to the number of syllables it takes to pronounce it. ("no car tax," "no death tax," "no food tax," all lend themselves very well to soundbites and slogans.)

You can also make a good case that a properly functioning property tax should take account of all kinds of property that most states currently don't tax, whether it's your car or your stock portfolio or that $3,000 Rolex. Property is wealth-- plain and simple. When states decide (as most have) that they're not gonna tax the value of your Rolex or your car or your stock portfolio, what's left is the one kind of "wealth" that is least recognizable as such-- homes. For many people, homes aren't a luxury and they aren't wealth-- at least not usable wealth.

So I've got a fair amount of sympathy for recognizing that the property tax should apply to things other than homes. Having said that, the wheel tax proposal seems like the wrong way to go, for three reasons:

1) The proposed wheel tax would be a flat-dollar amount. Maybe $10, maybe $50. But the biggest Bentley would pay the same tax as the tiniest Toyota. By comparison to the more sensible approach of taxing cars based on their value, the wheel tax proposal would be sharply more regressive-- a much worse deal for low-income families-- because $50 is a much bigger share of income for someone earning $10,000 a year than for someone earning $100,000 a year.

2) Car taxes can be written off on your federal income taxes (if you itemize) if they are based on the value of the car. If they're just a flat dollar amount, they can't. So the choice to impose the flat wheel tax basically means deciding that Indiana doesn't want the federal government to pick up part of the tab. A flat-dollar wheel tax leaves federal money on the table.

3) A "flat-dollar" tax is about as slow-growing a revenue source as you can invent. The only thing that can make revenues go up from year to year is an increase in the number of cars. (By contrast, income and sales tax collections increase, more or less, automatically with inflation.) The amount this tax brings in from each existing car actually shrinks a little bit each year: $50 a year in 2007 is worth a little bit less, after inflation, in 2008, a little bit less in 2009, etc.

As another lawmaker points out, Dobis deserves "all the credit in the world" for bringing up what is being described as a "political third rail." (Seems like Indiana has more third rails than the New York subway...) And it would be a good thing if this proposal resulted in some enlightened deliberation over the future of Indiana property taxes. But it's certainly not the fairest-- or most sustainable-- way to fund Indiana's transportation funding needs.

Of course, Washington has retreated pretty fast from its car tax: the former annual 2.2 percent statewide tax on a car's value got repealed more than six years ago, although some local value-based taxes remain in force. But it would be nice if the ongoing property tax debate could be extended to think more generally about what the property tax really ought to apply to. It's hard to argue that cars universally ought to be excluded from taxation.

For a bigger-picture study of Washington's property tax, check out this report from the Washington Budget and Policy Center.

The "Circuit Breaker" Solution

At the state capitol, the property tax reform ideas are flying fast. But one of the best ideas-- a property tax "circuit breaker" credit targeted to fixed-income families-- is getting less ink than it should. A new policy brief from the Washington State Budget and Policy Center will hopefully help change that.

The brief shows that a circuit breaker credit could help reduce property taxes for low-income Washingtonians by up to 15 percent without further endangering the state's ability to fund public services.

Read it on the Budget and Policy Center's website here.