What is a tax for? Is it to raise money, or is it to solve a social problem? Sometimes, legislators think they can use a new tax to do both. That's what the legislators in California thought. They had a huge cash shortfall and a social problem, and they came up with a new tax they thought would solve both. I'm sure they thought they had found the perfect solution.
One of the new popular trends in alcoholic beverages are the bottled drinks nicknamed "alcopops". They earned that nickname because even though they contain alcohol, they taste more like soda pop (Smirnoff Ice, Mike's Hard Lemonade, etc.). They are especially popular among young women -- particularly those who are underage and not used to drinking alcohol.
The alcopops were classified as beer and taxed at the same rate. But the legislators had what they thought was a brilliant idea. They would reclassify the alcopops as hard liquor and then tax them at the higher rate that purchasers of hard liquor must pay. They reasoned(?) that the higher cost of a six-pack (about $1.74 or 20%) would cause teenagers to stop drinking the brew, and would create a new $38 billion in annual revenue.
But it didn't work. Alcopop drinkers don't drink it because it's cheap. They drink it because they want to get drunk and don't like the taste of alcohol. Another couple of dollars may be a minor annoyance, but it won't deter the alcopop drinkers. They're just happy to have found an alcoholic drink that doesn't taste like one. So legislators struck out on curing the social problem.
At least they pumped a lot of new dollars into the state's revenue coffers, right? Well, no! The new tax went into effect last October 1st, and to date the tax collected is a whopping $9000. At that rate, they'd be lucky to raise $20,000 a year. That's a far cry from the expected $38 billion. What happened?
It seems that the manufacturers did exactly what they told legislators they would do -- they changed their formula and lowered the alcohol content to exactly that contained in a beer. This allows them to go on paying the lower beer tax. Some state employees don't believe this, but they don't have the wherewithal to check the products and the manufacturers refuse to give their formula to the state.
They claim the formula is private property and protected because it is a trade secret. The federal Alcohol and Tax and Trade Bureau has access to the formula, but refuse to divulge it to the state. They say the Federal Trade Secrets Act and the federal tax code prevent them from releasing the formula.
So the new tax is not accomplishing any of the goals it set, and there is very little liklihood that it will do better in the future. The legislators must take the blame for this failure. If they had thought it through, they would have known that taste and not price was the reason teens like the product. They also didn't listen when the manufacturers told them what they would do.
This tax was already a failure before the final vote was taken to pass it.
There's a cautionary tale to be learned from all this. Whether in reality or on paper, taxes have a strong tendency to discourage the very activity they tax, thereby decreasing rather than increasing revenues.
ReplyDeleteFor example, if you increase taxes on the "rich" (i.e. those making > $250K a year), at least three things could happen: 1) the "near-rich" will start to slow down their productivity as their income approaches the magic $250K (e.g. lawyers will take on fewer cases); 2) accountants will find newer and more creative loopholes and tax shelters (sort of like the example you cite); or 3) businesses will move their operations overseas to countries where productivity isn't punished.