Spendoholism and Addiction Taxes

There are many ways to measure the degree of fiscal desperation in government. When statists, who unfortunately run too many governments, both around the world and here in America, realize that they may not have enough money to keep funding their beloved welfare state, they resort to all kinds of ugly political trickery. One such trick is austerity, which as we know all too well by now is a macroeconomic poison pill.

Another trick is to go trawling for new taxes in morally muddy waters. More and more states and local governments want to raise taxes on alcohol, tobacco and gambling, and some even want to legalize medical marijuana in order to create a new tax base.

These are not sin taxes. A sin tax is a tax aimed at reducing the consumption of something that lawmakers consider sinful. No, these are addiction taxes. An addiction tax is a tax on a product that people get addicted to and therefore cannot stop consuming as easily as something they are not addicted to. Because of the addiction, consumer spending is relatively steady and therefore provides a highly predictable tax base.

Addiction taxes are now becoming an issue in the presidential election. KRDO TV reports on a recent interview with Republican VP candidate Paul Ryan:

A five minute chat with Republican Vice Presidential Nominee Paul Ryan turned into a very informative conversation.  In between pitching the Romney/Ryan five point plan to turn around the economy, we talked about medical marijuana.  It was a question suggested by Paul on our KRDO NewsChannel 13 Facebook page.  Medical marijuana is a hot button issue in our state and across the nation. I asked Congressman Ryan: “In Colorado we have medical marijuana. Under a Romney Ryan ticket, what happens?”  Ryan: “It’s up to Coloradans to decide.”

And they already have. Denver has a medical marijuana system that funds, among other things, mass transit and – ironically – drug prevention programs.

I said: “So even if federal law says marijuana is illegal, you’re saying?” Ryan: “My personal positions on this issue have been let the states decide what to do with these things. This is something that is not a high priority of ours as to whether or not we go down the road on this issue.  What I’ve always believed is the states should decide.  I personally don’t agree with it, but this is something Coloradans have to decide for themselves.”

From a principled, constitutional viewpoint, Congressman Ryan is right, and that is the place to begin. The United States is a constitutional, federal republic that grants its federal government enumerated – not unlimited – powers.

From an economic viewpoint, this is not as easy. The reason is called Federal Aid to States. The federal government runs a conglomerate of spending programs where it sends money to state governments. For some of these programs, states have to cough up matching dollars, which for many of them is a significant addition to regular spending. In 2011 a dozen states got more than 40 cents of every dollar they spent from the federal government; the federal share exceeds one third of the state budget in 28 states. If we include what the states have to spend in the form of matching funds, the federal government directly or indirectly dictates more than half of the budgets in 20-25 states.

The states have to come up with matching-fund revenues one way or the other. Given how the federal government has been expanding Federal Aid to States over the years, this need for new state revenues is only increasing. Unless a Romney-Ryan administration is actively going to work to reduce this pressure on states, they might actually – inadvertently – be pushing them toward delving deeper into addiction tax territory for more money.

But you don’t need a Romney-Ryan administration to put this problem on the spot. States and local governments are pretty good at doing it themselves. A recent example is the push by Maryland Governor O’Malley to expand gambling. I reported on this a month ago, when I noted that Governor O’Malley…

…has been the governor of Maryland since 2007. During that time he has raised taxes 24 times. Yet for some reason he still can’t find enough money to pay for all his spending. For some pesky reason his tax base keeps moving out of state: in the 2009 Census Bureau state-to-state migration study, four of the top five states to which Maryland suffered the biggest net loss of residents had lower taxes than Maryland. Pennsylvania (second largest net loss) has a low, flat income tax and Virginia has a flat rate, one percentage point below Maryland, above $17,000. So both the rich, the high-income earners, the shoppers and the jobs all refuse to stay in Maryland. But instead of considering the possibility that it might be a bad idea to raise a tax every ten weeks for five years, Governor O’Malley forges ahead with yet another tax grab. This time, though, he wants to make sure the tax base does not leave the state. What better constituency to target then than addicts?

Yep. Governor Martin O’Malley wants gamblers to feed his state’s coffers. But things may not be going so smoothly with his addiction-tax expansion plan. Today the Washington Examiner reports:

School spending in Maryland won’t increase just because more money is expected to flow into its Education Trust Fund through an expansion of gambling, according to tax experts. Lobbying groups on both sides of the issue are running ads focusing on education spending. Anti-gambling advertisements are bashing plans to allow a Prince George’s County casino, table games such blackjack and roulette and 24-hour casino operations — all measures requiring the approval of voters statewide on ballots in November. The ad, paid for by the committee Get the Facts – Vote No On 7, says a loophole allows the state to avoid increasing spending on education.

Governor Grabbin Yo’Money has been selling his gambling tax idea precisely as a measure to fund schools. He’s basically been telling parents and grandparents in Maryland that if they don’t waste their hard-earned money on his slot machines, their kids and grandkids won’t get A’s in school. (This is reminiscent of the Democrat gubernatorial candidate in Maine back in 2010 who essentially told Maine parents to drink more alcohol or else their kids might not get to go to college.)

But lo and behold! All of a sudden we discover a convenient little loop hole that allows the state government to siphon away money from the gambling tax to other spending programs. Apparently, the only thing stronger than a gambling addiction is a politician’s spending addiction.

Back to the Washington Examiner story:

“There’s actually no obligation to use revenues in Maryland’s classrooms,” according to the committee’s website. Pro-gambling ads tout the gambling plan’s ability to generate $199 million in new revenue for the Education Trust Fund. Neil Bergsman, director of the Maryland Budget & Tax Policy Institute, says the Get the Facts ad is not entirely true — but what is accurate is that Maryland’s spending on education won’t be affected by an increase in gambling revenues. Money put in the Education Trust Fund will increase $174.5 million from gambling profits by fiscal 2017, according to state budget analysts. But at the same time, they project the state to reduce the amount of money from the general fund used on education — meaning that money can be used elsewhere.

Well, given the fact that Governor O’Malley has raised a tax once every ten weeks for the past five years, we should probably not be surprised at this. But it is still startling to watch how politicians in a state like Maryland get away with ever more spending.  It would be even more startling if the governor and his statist friends in the state legislature ever discovered the relation between their relentless pursuit of higher taxes and the tax base flight out of the state.

Until then, let’s note again that when our politicians exploit people’s addictions for the purposes of even more government spending, they have lost a very important moral compass. The eagerness with which our lawmakers and government executives dive into the muddy waters of addiction taxes is scary: it raises the question of what will come next. General legalization of marijuana? Legalization of other drugs?

What about other activities that are not necessarily related to addictions but still considered vices? How far is the stretch from legalized medical marijuana for tax purposes, and legalized prostitution for the very same reason?

The unhealthy pursuit of ethically questionable or objectionable taxes would stop if government stopped spending. This is a fact that both Congressman Paul Ryan and Governor Martin O’Malley need to consider.