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.

A government needs revenues. So what does it do? It taxes the poor. That happens too often, says Michael Davis, a senior fellow at the National Center for Policy Analysis (NCPA) in Dallas. "It's politically expedient."

The poor don't vote in elections to the degree the middle class and the rich do. Nor do they often contribute to political campaign funds. They don't have much money left over for that after paying for housing, food, and clothing.

And the poor squawk less over tax hikes.

One frequent way the poor get hit is additional "sin taxes" – taxes placed on gambling, tobacco, and alcoholic beverages. Because the poor tend to consume more of these items per capita than do those who are better off, poorer people bear a disproportionate share of that tax burden.

State legislators can and do argue that taxing cigarettes and liquor discourages these often-harmful habits. And, they may add, expanding state-sponsored lotteries or other gambling can provide revenues for positive government activities, such as education.

At the federal level, Sen. Gordon Smith (R) of Oregon is proposing legislation to expand spending for the State Children's Health Insurance Program, which provides insurance for children from poor (and some not-so-poor) families. He'd finance it by boosting the federal excise tax on cigarettes.

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.

Those who buy lottery tickets are in effect paying a tax of 40 to 50 percent to the states. Only 50 to 60 percent of the money is paid out in prizes. Casinos pay out 85 to 90 percent of their revenue to gamblers, horse racetracks about 85 percent.

Davis says liberal tax groups in Washington don't seem so bothered by such taxes on the poor. He's disappointed that so many states are promoting their lotteries with videos of happy, smiling gamblers. Given that so many people lose, he observes, ticket-buyers have little reason to cheer.

Another Tax Foundation study, released last week, complains that state lottery agencies promoted Independence Day as a good day on which to gamble. "Star Spangled" games push "regressive, misguided policies."

Alicia Hansen, author of the study, recalls a public opinion survey last year that found 21 percent of respondents said playing the lottery was "the most practical strategy for accumulating several hundred thousand dollars" for retirement. Nonsense, she says. The stock market over 40 years could return, on average, 811 percent more than the same amount of money spent on a lottery, given the odds of winning.

Timothy Kelly, executive director of a 1999 national commission on the impact of gambling, figures that its report may have slowed a bit the spread of gambling in the US. Nonetheless, the gambling industry is "on a roll," he admits. And once a gambling industry, with its ample supply of cash, has established itself in a town, "the local government tends to be subservient."

Further, the spread of gambling has produced about 15.4 million "pathological" gamblers, half of them adults, half adolescents. They, the commission found, tend to engage in "destructive behavior," such as engaging in crime, piling up huge debts, damaging relationships with family and friends, and even – in extreme instances – committing suicide.