NCPA - National Center for Policy Analysis


July 1, 2009

Any benefit from excise taxes offsetting the cost of harmful behaviors is overshadowed by their inefficiency, ineffectiveness and regressivity.  A better approach is to balance the budget and reallocate resources from other programs toward priorities like health care and energy development, says D. Sean Shurtleff, a policy analyst with the National Center for Policy Analysis.

One of the major problems with higher excise taxes is that they may encourage substitution.  Cigarette smokers may substitute cheaper cigarettes for more expensive ones, or soda drinkers may turn to other sugary drinks.  Additionally, excise taxes may encourage grey and black markets, where buyers import cigarettes or alcohol from foreign countries that don't tax these products or obtain untaxed goods in other illegal ways, says Shurtleff. 

These may be some of the reasons why economists Jason M. Fletcher, David Frisvold and Nathan Tefft found that:

  • Increasing the soft drink tax by 55 percentage points would decrease the obese and overweight population by only 0.7 percentage points.
  • That means a 27.5 cent tax on a 50 cent can of soda would only lower the number of the obese and overweight from 66 percent to 65.3 percent of the population.

Furthermore, low-income families spend more of their incomes on products subject to excise taxes than higher income families, making excise taxes very regressive, says Shurtleff.  A Bureau of Labor Statistics report, "Consumer Expenditures in 2007," shows that:

  • On average, the bottom fifth of income earners spend 1.7 percent of their gross income on alcoholic beverages compared to 0.6 percent for the top 20 percent.
  • They spend 2.5 percent of income on tobacco products versus 0.2 percent for the top 20 percent.
  • They spend 9.9 percent on gasoline and motor oil compared to 2.3 percent for the top 20 percent.

Looking at all federal excise taxes combined, the Congressional Budget Office (CBO) estimates that the bottom fifth of income earners pay 1.9 percent of their income in excises versus 0.4 percent for the top fifth.

Source: D. Sean Shurtleff, "Not-So-Sweet Excise Taxes," National Center for Policy Analysis, Brief Analysis No. 663, July 1, 2009.

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