Happy Labor Day! Hope everyone who isn’t working today enjoys their day off.
As always, our Monday morning post is brought to you by Stephen Hall.
So, having a hectic week, and in the midst of remodeling the kitchen, it seems a good time for a thought exercise post so that we can relax on a less sophisticated and frivolous endeavor than our typical Monday morning venue.
To wit: It occurs to me that when you consider the actual nature and location of production of those commodities which have very low elasticity of demand and therefore are taxed at a usurious rate in relation to your standard sales taxes, that certain states, and in particular to more liberal north eastern states, may run afoul of the commerce clause of the US Constitution.
In simpler terms, do state “sin” taxes contradict the federal preemption of regulation of interstate commerce, given that the sinful products are more often produced in the Bible Belt?
An often overlooked part of the commerce clause, or more properly commerce clauses, Paragraphs 1 & 3 of Section 8, Article I, of the US Constitution, in part: “The Congress shall have power to lay and collect taxes, duties, imposts and excises, . . . but all duties, imposts and excises shall be uniform throughout the United States; . . . To regulate commerce . . . among the several states . . . .”
So to put this in perspective if the federal government was to impose a tariff on a product being imported into the states, it would be Constitutionally prohibited from imposing a higher tax on goods imported into New York than those same goods imported into the Carolinas.
States are prohibited from imposing import tariffs on goods from other states, as that power is granted exclusively to the federal government. That is to say, New York cannot impose a tariff on goods manufactured in North Carolina to be sold in New York.
What brought this to mind was the raising of cigarette prices in places like New York where a pack of cigarettes generally costs around $13 per pack. Throughout most of the country that same pack of cigarettes will cost about $5 to $6, less than half the price in New York.
The price difference is not from some evil, greedy corporation extorting the unwillingness of the customer to change their behavior leeching off of the addictive nature of the product; it is the evil, greedy, state governments.
This is the nature of a “sin” tax, it is on a product which has inelastic demand, which means that the consumer behavior does not change much due to a change in the price of that product, at least in the short run. These are the very products which states choose to tax at a much higher rate simply because they can.
If a product had elastic demand, then adding the tax would dramatically affect the amount of the product sold. Such products are highly sensitive to price changes, and therefore throw off the states’ revenue estimates.
One problem that states run into in labeling a product with an inelastic demand as a “sin” worthy of higher taxes is that most such products are necessities and taxing them is always regressive, that is a disproportionate part of the tax is paid by the poorest of society. This is why many states have tried a flat sales tax, but often find it politically expedient to exempt food, as the epitome of the “non-sin” or a preferred necessity.
Thus states look for unpopular products with high levels of demand which are also inelastic, that is something they can label a “sin”. These include alcohol, tobacco, gambling, & gasoline. Some places will include sugary soft-drinks and junk food.
Make no mistake, the governments are not taxing these products because they care one whit about your family’s health, no matter how much they pretend, but rather precisely because you will go on consuming these vices even at outrageous prices.
Back to the original premise: If the tobacco and cigarettes were exported from North Carolina to Europe, then re-imported to New York, the state would have no authority to impose an import tariff on the cigarettes because that is the federal government’s exclusive domain under the Constitution.
Certain crops, like tobacco, cotton, and sugar made up the original cash crops of the south and was one of the original sources of economic, political, and social division in our country. Europe imported these crops from the south, but competed with the northern states.
When a group of states imposes a “sin” tax on the consumption of goods produced overwhelmingly in other states; is that really just a tariff by another name? New York could not impose a tariff on the importation of Carolina tobacco, but they can impose a “sin” tax on the consumption of Carolina tobacco.
Sin taxes on Texas oil products, Carolina tobacco products, Kentucky and Tennessee alcohol products, or Coca-cola (Originating in Atlanta) or Pepsi (Originating in North Carolina) seem to all be one direction to a large extent. Okay, you do have some mid-western and western sources for popular sins of commercial beers (Michigan, Missouri, & Colorado).
What you don’t see are red states imposing “sin” taxes on movies, television, Google, and Twitter. Yet those commodities certainly qualify as vices but are almost exclusively produces in just a few blue states.
In theory, the federal government could impose a interstate tariff which would apply to commerce between the states and it would be fully within the federal authority to do so, but such a tariff would have to be uniform throughout the states.
Tariffs have gained an undeserved reputation as inherently harmful to economies, but at a modest level they are no greater imposition than the very taxes we impose already on various goods and services.
If one thinks of a “sin” tax as a form of tariff on products produced in other parts of the country, then certain states are doing an end-run around the interstate commerce clause of the Constitution and just renaming their tariffs as another type of tax.
Thus certain states are regulating interstate commerce to their benefit, and to the detriment of other states, by controlling what gets labeled a vice worthy of taxation. I am left to wonder if it is a coincidence that the industries which actually do the labeling are all in those very states which benefit the most from this back-door tariff scheme.
Where are the New York cigarette smokers and soda drinkers in protesting this tariff? There is a great deal of organized crime which centers around avoiding these “sin” taxes.
It should thus be noted that one John Hancock, signer of the Declaration of Independence, was in the nefarious business of avoiding such tariffs from English sugar producing colonies in favor of the much cheaper French sugar. A certain political family on the Democrat side of the aisle got their start avoiding commodity restrictions upon alcohol once called prohibition.
Technically a sales tax in not a tariff, neither is an excise tax. On the other hand, our Supreme Court has recently labeled an unreasonable fine as merely a tax regarding Obamacare. How much stock does one want to place in mere labels as opposed to the actual effects and implications of policy?
Interstate tariffs are prohibited. Sin taxes are prevalent. Are “sin” taxes interstate tariffs by another name? Does it smell as sweet?
