When governments need more money, they turn to sin taxes as an easy option. Gov. Bev Perdue has done that in a big way by proposing an unprecedented $500 million tax increase on cigarettes and alcohol.
Perdue faced an enormous challenge in compiling a budget this year, given that state revenues will fall $3.4 billion below expectations. When such an enormous shortfall develops, everyone should sacrifice, including the tobacco industry. That is especially so because cigarettes create health costs for their users that the state helps pay.
But Perdue has singled out a narrow portion of the economy to bear the brunt of the increases because it is politically expedient to do so. The proposed increase of $1 a pack -- the state tax is now 35 cents -- would be devastating to cigarette sales in this state, to the many North Carolinians who work in the tobacco industry, and to low-income smokers who cannot wean themselves from the product.
It is important to remember that the federal government will pay for recent child health-care enhancements with an April 1 increase of 62 cents per pack -- raising the total federal tax to $1.01 from the current 39 cents.
Another dollar a pack of state tax on top of that is too much. Granted, when cigarettes go up in price, fewer teens smoke, and that's a positive reaction. But a smaller increase could also reduce teen smoking without dramatically cutting sales to adults, which results in a loss of tobacco jobs.
State Sen. Linda Garrou, D-Forsyth, one of the legislature's chief budget writers, told the Journal's James Romoser that she opposes any tax increase on cigarettes this year. "Here we've got a company (R.J. Reynolds Tobacco Co.) that's paying a big amount of taxes to the state. They employ people. They have good jobs…. The semi-skilled jobs, those are the jobs that we need."
Regarding the alcohol tax, the potential damage that the proposed 5-percent supplemental tax increase will do to a fast-growing North Carolina industry may be less obvious to lawmakers and Perdue. Across the state, local start-up companies like Winston-Salem's Foothills Brewing are making excellent new beers. They are bringing jobs to the state and keeping money in our economy.
The alcohol tax, on top of what are already some of the nation's highest state beer taxes, would hit these brewers disproportionately. These craft beers, because they use expensive ingredients and are brewed in small batches, are more expensive than the huge international brands. Because Perdue would levy the tax on a percentage of the retail price, she would drive up both the pub and grocery store cost of the locally brewed products more than the cost of those brewed in factories.
In addition to tax increases on cigarettes and alcohol, Perdue's proposed 2009-2011 biennial state budget is balanced in large part with federal stimulus funds and $360 million in cuts. The budget would eliminate 1,411 positions in state government, close seven state prisons and freeze reimbursements for Medicaid at the current level, among other cuts.
All are tough choices, but the governor's plan follows through on her campaign promise to increase spending on education, and it does not divert money from the lottery, as was necessary in the current budget.
For a decade now, public policy commentators have been calling on the state to adapt its tax structure to the 21st century economy. Unfortunately, Perdue chose not to look for innovative methods of spreading a new tax lightly over the wide breadth of the economy, touching everyone just a little. Instead, she has chosen two industries -- both of which provide good-paying jobs -- and placed the entire burden on them.
The state is in a financial crisis, but a compromise solution to balancing the budget is called for. Smokers and drinkers will be hit with some amount of price increase; there's probably no way around that. But the legislature must help the governor find a more reasonable and equitable approach for all North Carolinians.
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