Raise Tobacco Taxes to Fund Income Tax Cuts?

December 14, 2006

In South Carolina, Governor Mark Sanford is putting forth a plan to raise cigarette taxes while lowering the state income tax. From the Charleston Post and Courier:

Gov. Mark Sanford on Wednesday proposed increasing South Carolina’s cigarette tax from 7 cents to 37 cents per pack, with the revenue paying for income tax relief.

But he could be in for a fight with lawmakers who want revenue from a cigarette tax increase to be spent on health care, and with tobacco farmers and smokers.

In the latest preview of his executive budget, Sanford proposed allocating $205 million for personal, corporate and small-business income tax cuts. He wants to send $98 million in annual revenue back to taxpayers. The 30-cent cigarette tax increase would generate an estimated $107 million annually to reduce income taxes further.

“This is a very modest proposal,” Sanford said. (Full Story)

Unfortunately, the governor appears to be trying to use the tax system to redistribute income from a political minority (smokers) to a political majority (all income taxpayers), despite the fact that this plan has little, if any, economic rationale. The proper tax policy is to have the tax imposed per pack of cigarettes equal to the negative social cost imposed on society from that pack of cigarettes’ consumption, and nothing more or less.

A case could also be made for following the Ramsey Rule–taxing goods per unit based upon their relative elasticities (the extent to which their consumption is sensitive to price) so as to limit deadweight loss. However, if policymakers choose this option, then they should also lower taxes on many other elastic goods (like luxury items) and raise taxes on many inelastic goods (like gasoline, electricity, water, food, etc.). It is doubtful that the governor would implement such a politically unpopular system.

If, on the other hand, the governor’s rationale for this proposal is merely that smoking is wrong, one needs to ask the question, “Is that the role of government to determine?” In a free society, individuals are left to make their own decisions and live with the consequences. There are many activities that offend some Americans, sometimes even a majority of Americans. But using the tax code to control individuals’ behaviors merely because someone else–or some lawmaker–may find that behavior to be immoral could lead down a dangerous road where freedom is abandoned.


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