Tax revolt recipe

Here in the Washington bubble, our focus tends to be on the high-profile battle over President Obama’s budget. But the 50 states are suffering from the economic downturn as well. Spending cuts and federal stimulus money isn’t enough to balance state budgets — they’re all looking elsewhere for increased tax revenue.

Sin taxes, especially on tobacco products, are particularly popular this year. Some 20 states are looking to tobacco for increased revenues, and many of those proposals are in places were tobacco has been virtually untouchable for years. While Virginia turned down a tax increase, Kentucky and Arkansas doubled the state tax and North Carolina, South Carolina, Georgia and Mississippi are looking hard at major increases. In past years such increases in other states have generally been tied to health and smoking cessation programs. But in most states the monies are headed straight to the general fund this year. Legislators and governors are trying to balance budgets rather than change consumer behavior.

The tobacco industry argues, without much success, that the tax increases unfairly hit the working class and the poor. “Many of these states are asking the very definition of Main Street to bail out state capitals,” says one spokesman. Lobbyists add that the 62-cent increase in the federal tax that went into effect this week makes the burden intolerable. While the industry once argued that higher taxes don’t influence consumer behavior, it now says the taxes will drive down consumption, meaning states will be funding important programs with a declining funding source.

It is not just tobacco that is in legislators’ and governors’ sights this year. A number of states are looking at increases in taxes on beer, wine and spirits. California Gov. Arnold Schwarzenegger (R) dropped his proposed tax increase in a complicated budget deal worked out with the state legislature. But a beer and wine tax increase remains in Gov. David Paterson’s (D) budget in New York. In most states, though not so much in California, the argument was at least partially health-based. Still, the money all flows to the general fund, making it pretty clear that what the governors are after is a way to balance budgets.

A healthier population was the driving force behind proposals in half a dozen states to tax sodas, juice drinks and some sport drinks this year. Billed as an “obesity tax” in the most high-profile effort in New York, the tax represents (according to its opponents) an expansion of the concept of sin taxes and the “nanny state.” Gov. Paterson launched a high-profile campaign to promote his tax that included a video of the state’s chief health officer tossing around a large ball of fat to represent the additional weight soft drinks add to regular drinkers each year.

A coalition of small grocery stores, bodegas and distributors backed by major bottlers successfully forced the governor to pull his “obesity tax” proposal from the final budget package sent to the legislature. That grassroots battle may well be the first skirmish in a contentious relationship between governors and their constituents over the next few years as deficits continue to mount and citizens grow weary of increased taxes. It was clear to elected officials in Albany that New Yorkers were getting fed up with taxes and — while they might agree we could all be healthier — they preferred education and exercise to taxes as a way to get there. Most also resented the government telling them how to live their lives, preferring to make lifestyle choices themselves.

Similar attitudes are also slowing down efforts in a number of cities and states to levy higher taxes on plastic bottles and those ubiquitous bags used to tote home everything from groceries to hardware. Although a few cities have banned plastic water bottles from public buildings, consumer resistance to taxes on them is growing. Polls show increasing numbers of citizens prefer more aggressive recycling efforts to higher taxes. That is going to put revenue-starved states and cities in a bind. Their citizens are fed up with taxes, don’t trust government to spend the money wisely and want simpler and expanded recycling programs to deal with solid waste and litter.

We’re getting mixed messages from American voters. They remain supportive of President Obama’s ambitious budget and economic plans. They are growing more resistant to states balancing budgets with a grab-bag of tax increases on specific products. That may suggest trouble ahead for the administration as voters focus on just how we pay for healthcare, education and a new energy policy.

Goddard is a founding partner of political consultants Goddard Claussen.