"Politicians say more taxes will solve everything." — Lyric from the prophetic 1970 hit "Ball of Confusion," by the Temptations.
Thanks to the virus lockdown's economic collapse, state and local governments everywhere are experiencing a perfect storm of plunging tax revenues and increasing expenditures. Closed businesses don't generate much in sales taxes, permitting, licensing and many other fees. Same with torched and looted stores. Laid off or terminated workers have zero state income tax withheld. Many of those businesses deemed "essential" have seen their sales drop, along with the taxes collected by those businesses, with one notable exception: the sin taxes. The sin and many other types of taxes are used for social engineering, rewarding some economic behaviors while penalizing others. Governments have learned that sin tax increases usually face less opposition than boosting other types of taxes.
In 1773, Bostonians dumped 342 chests of tea into the harbor in response to King George's onerous taxes, eventually leading to the War of Independence. Fast-forward to 2020, where we face a bewildering web of taxes and fees — just ask any business owner's accountant. States and cities across the nation are not raking in anywhere near the revenues projected before COVID-19 whacked so many of us in the wallet.
Due to depression and boredom, today's major tax bright spots are the sin taxes levied on alcohol, tobacco, marijuana and gambling. In addition to raising revenue, governments believe that high sin taxes will deter some people from drinking, smoking, partaking and wagering to excess. These taxes have little effect on high-income consumers. Lower-income consumers who refuse to give up their sin(s) are hit much harder by regressive sin taxes.
Substance use and abuse, both legal and not, have increased as the pandemic marches on. Colorado marijuana sales just shattered all previous records, with alcohol and tobacco following right behind. Even President Trump has mentioned this in recent remarks referencing the side effects of lockdowns. According to market research by Nielsen, national alcohol sales surged 55 percent during the first week of state-ordered lockdowns. As a result, governments are seeing increased sin tax collections. Desperation crossed with boredom can prompt people to spend or wager cash that should go to rent, bills, food, etc.
A year ago, Colorado voters made sports betting legal, effective in May. With perfect pandemic timing, Fanduel, Points Bet, Bet Mgm, Draft King, Bet Rivers and more unleashed some big bucks on advertising to attract bored bettors. Surely they can afford a small tax increase on their particular sin.
Denver voters in the November election will be asked to approve or reject a major tobacco tax increase (Proposition EE) along with two sales tax increases, calculated to cover budget shortfalls while starting up several new spending programs that should wait for the economy to improve. Without TABOR, the politicians would have already imposed this tax increase without voters' approval.
If passed, Proposition EE will more than double the state sin tax from 4.2 to 8.75 cents per cigarette, with large, future year increases built in. Cigars, pipe tobacco and all other tobacco products will be hit with similar tax increases, along with some new taxes on nicotine vaping products that have so far escaped the taxman. This new vaping tax should be an entirely separate issue for voters to decide. Local governments are likely considering their own tobacco tax increases on top of the state levies.
Bus and train passengers should get ready to be subjected to many more aggressive bums wanting a "spare" cigarette or joint at every stop. Light one up and here they will come. Don't expect RTD security to do anything about it, as they are now prohibited from escorting non-passengers off RTD property.
Never underestimate the power of the black marketeers. When tobacco taxes get high enough, an incentive is created to drive to surrounding states with lower tobacco taxes and bring back a load to sell, making some un-taxed profits. There are many reservations in Oklahoma, New York and New Mexico that sell tobacco products minus some state taxes. These tribal smoke shops collect their own small sales tax to pay for tribal projects.
It is a risky business. Selling untaxed cigarettes on the street in New York City got Eric Garner ("I can't breathe") killed by some overly aggressive NYPD tax enforcement officers. A fully taxed pack of cigarettes in NYC now costs around $15 because of extremely high state and city sin taxes.
Years ago, it was commonly believed that legal, taxed and regulated marijuana would kill off the black market in Colorado. It did indeed shrink, but still exists for those customers wanting to avoid the tax while shelling out less green for their buds. Customers here can save around 30 percent by patronizing their local black-market dealers. California's black market is still doing quite well, simply due to heavy taxes and fees on legal businesses, much higher than here in Denver. Like selling untaxed cigarettes, dealing carries a real risk of arrest and criminal charges.
Using gasoline or diesel to power your car or truck is fast becoming the fifth sin, due to government concerns about CO2 and climate change. Since it's a simple tax to collect and with no black market to contend with, some states are boosting their motor-fuel taxes to help plug their budget holes, making it more expensive to drive. People on low or fixed incomes will simply drive less. Higher-income drivers will curse the tax, but don't expect much change in their driving habits. People who don't drive or own an electric car get to skate on this one for now. Of course, some states already have or are considering special fees for registering an EV to make up for lost gas taxes.
The State of California recently passed a bill making vehicles that burn gasoline and other CO2-producing fuels illegal by 2035. Between now and then, they will gradually adjust registration fees and motor-fuel taxes to discourage driving conventional cars and trucks while encouraging EV ownership. Once all of California's drivers have converted to EVs, the state will need to tax them based on miles driven, debiting drivers' bank accounts every month. Easy to do once all cars are tied into the Internet of things using those new 5G antennas springing up all over the metro. No more need for cops to hand out their "green stamps." Speeding and most driving infractions will be automatically reported to the DMV and appropriate tickets issued.
Ten years ago, the State of New York, infamous for taxing everything, discovered another lucrative sin to tax: sugar! It is addictive and well known to cause a variety of health problems when consumed in large quantities. Since the lockdowns began, increased sugar consumption has followed alcohol, tobacco and marijuana trends. Politicians in many states are now eyeing sugar and products that contain it for future sin taxes. It's just a matter of time before a sugar sin tax appears on a future Colorado ballot.
Many people engage in none of these sins, some do all five, others fall somewhere in between. To be fair, the projected revenues from the proposed tobacco tax increase should be divided by four or five, thus spreading out the pain among all the sinners.
Two years ago, Colorado voters rejected a similar tobacco tax increase. Because the revenue wasn't desperately needed at that time, it seemed like a form of punishment targeting one type of sinner. Since more than 80 percent of the population does not use tobacco products, the majority who voted "no" on that tax increase sent a message that voters understood the wrongness of targeting a minority of people with higher taxes, even if they are disliked by some. Historically, Colorado voters believe that taxes are high enough.
Back at the beginning of the lockdowns, three of the sins were ordered to close stores. The response was quick and loud. There ensued a notable stock-up rush at the affected stores, along with paper products, sugar, flour and other staples. Whew: liquor and marijuana stores were instantly re-deemed to be essential, but tobacco stores like Smoker Friendly, Puff-n-Stuff and Cigarette Outlet remained closed for a few months. Cigarettes were available at grocery and convenience stores, but high-quality cigars and pipe tobacco became harder to find.
Just imagine the uproar if the new tax increase targeted alcohol or one of the other major sins instead of tobacco? There would be anti-tax protests in the streets, a modern-day Boston Tea Party in Denver. Tobacco users are regarded as the easiest target for tax increases, as they are believed least likely to organize, march and potentially riot.
Is it fair to target one narrow group of sinners while letting the other sinners slide? Something to ponder when casting your ballot.
Ole Larson lives in west Denver. He's retired, and enjoys researching and writing.
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