6/22/98

KUFM / KGPR

T. M. Power

Tobacco Taxes and Pollution Taxes: Political Confusion?

Republicans have effectively killed the massive tobacco legislation that Congress and the American people have been debating for quite some time. The primary Republican criticism of the bill was that it involved a massive tax increase that would fund major new federal programs. In that sense, they said, it was a typical liberal "tax and spend" assault on our pocket books and liberty.

Narrow, dirty politics aside, the failure of the tobacco bill because it contained higher taxes on what almost all agree is a social "bad," a disease and death inducing commercial product, is not good news for the movement to try to control environmental damage by taxing heavily polluting activities.

The logic behind the use of our tax codes to try to move the economy towards a less environmentally destructive and more sustainable path is both convincing and practical in a hard-nosed business sense. Taxing polluting activities effectively puts a price tag on what is otherwise treated as a free good and over-used. It encourages those who use our water, air, and land to dispose of wastes to treat that waste disposal capacity of natural systems as the scarce and valuable resource that it is. The tax would encourage firms to reduce their pollution, encourage them to seek other technologies that have a smaller environmental impact, and, by raising the price of products, discourage consumption of goods that are produced by environmentally damaging processes. Such pollution taxes improve the price system that guides our economic activities by incorporating into those prices more accurate information about the real costs associated with the production of different goods and services. Prices that more accurately reflect costs encourages each of us as we go about our day-to-day living to behave in a more environmentally responsible manner. The pollution taxes help to better align the incentives we face as producers and consumers so that those incentives do not conflict with our environmental values and public policies. Why would we want it any other way.

One could go further in defense of pollution taxes. All taxes discourage some activities while encouraging others. That is why the tax codes are so complex. We try to encourage certain types of activities such as home-owning, charitable giving, productive investment, etc. by reducing the taxes associated with them. The advantage of taxing environmental damage is that we know that we want to discourage that activity. That is not true of income taxes or corporate profit taxes or property taxes: In general we do not want to discourage the earning of income, the generation of profits, or the ownership of homes and businesses. So, if we can shift the burden of taxation away from things that we really do not want to discourage towards those things that we are agreed we do want to discourage, we kill two birds with one stone. We encourage productive economic activities while discouraging environmentally wasteful economic activities. As a result, there is almost certainly an overall gain in the productivity of our economy.

If the tobacco tax increase had been more closely tied to a shifting of the burden of public funding of the health care costs of tobacco-related disease from other state and federal tax sources to the tobacco tax, it would not have been as easily labeled a "tax and spend" bill. Instead it would have been seen as simply funding the public liabilities associated with tobacco in a more rational way that reduced the upward pressure on other taxes we pay.

But the issue that Republicans have cynically exploited, the "working class" aspect of the tax, would remain. A significant part of pollution taxes, like cigarette taxes, are likely to paid by the consumers of products. In that sense they can be depicted as an unfair burden on middle and lower income folks. Since we want to raise the price of goods produced in environmentally damaging ways to better reflect the full costs of those products, there is no way out of this dilemma, just as there is no way around the fact that if we want to discourage smoking, one of the things we need to do is raise significantly the cost of tobacco products. Since, in both cases, the general public will be called upon the carry a significant part of the burden associated with the damage caused by these products, there is nothing unfair about this.

If we are serious about not increasing the tax burdens on middle and lower income households, there are ways of offsetting this increased taxation of environmental and health "bads." One could, for instance, make a point of disproportionately lowering the income tax rates for middle and lower income households so that they, as a group, were no worse off. That, of course, is the opposite of the direction Republicans wish to go, which says something about their real concerns.

We need to clarify our thinking about the legitimacy of shifting tax burdens from "goods" to "bads." Doing so is no magic economic bullet, but it does help rationalize public health, environmental, and tax policy in ways that will both improve the quality of our lives and reduce the burden of the taxes we have to pay. Our first venture in this direction with the tobacco legislation has not been encouraging.