Free choice to use tobacco and alcohol — Tax free!

Some go so far as to call for abolition of “differential excise taxes on tobacco, alcohol and entertainment. These kinds of taxes, often called sin taxes, are disrespectful of people’s freely made choices and represent an unwarranted interference with private decision making.”  Roy Cordato, Sales taxes and free choices, (May 25, 2010),  That’s wild.  The full letter is pasted below.

A more mainstream conservative view that is skeptical of excise taxes on specific goods says a tax should be “[n]eutral in its impact on resource allocation decisions” but allows for non-neutrality where there are negative externalities or “spillover effect.”  Joint Economic Committee Study by Richard K. Vedder and Lowell E. Gallaway, Some Underlying Principles of Tax Policy (September 1998),

Point of View

Sales taxes and free choices


May 25, 2010

RALEIGH — Should North Carolina’s sales tax be expanded to include the purchase of services like haircuts, lawn care and automotive repairs? As one expert recently argued to the General Assembly’s Joint Finance Committee on Tax Reform, “There is enormous revenue-raising potential in the sales taxation of services.”

It was claimed that such an expansion could raise an additional $1.5 billion a year for the state’s treasury. If one’s goal is to maintain current spending levels or increase them, estimates like these make the sales tax expansion an inviting proposition. But for those of us who believe that North Carolina’s government is already too big, the possibility of a straightforward extension of the sales tax to services would be nothing more than another tax increase.

This does not mean that, as part of a general reform of the sales tax, extending it to services would necessarily be a bad idea. But it would make sense only if it included the elimination of the hidden double taxation of consumer sales and the special tax penalties that exist in the current system.

Under the current system both business-to-consumer and business-to-business sales are subject to sales tax. This results in double taxation. For example, if someone goes into a drug store and buys a bottle of shampoo, that person pays state and local sales tax on the price of the purchase. But the drug store also has paid a sales tax on all of the products and equipment that went into providing the shampoo to the customer, i.e., the cash registers, store shelves, credit card equipment, etc.

The cost of these items, including the sales tax, is embedded in the price of the shampoo. Therefore the customer is paying the sales tax that is hidden in the price plus the tax on the final sale. Hence, the shampoo to the customer is double-taxed.

Once this fact is considered it becomes readily apparent that even services are not going completely untaxed under the current sales tax system. All goods that go into providing services, i.e., a lawn care company’s lawn mowers, a hair salon’s clippers and an auto repair shop’s tools, are subject to the sales tax. These taxes are included in the price of the service.

Finally, there are many goods, and even services, that are taxed at extraordinary rates. While the sales tax rate in North Carolina is 5.75 percent (plus another 2 percent in most localities and an even higher percentage in some counties), movies and other entertainment, alcoholic beverages, tobacco products, hotel rooms and rental cars are all taxed at higher rates.

In a free society, the purpose of a tax system is simply to raise money for the operations of government. It should not be used to punish activities that are disfavored by politicians or to reward activities that politicians consider to be virtuous. Indeed, principles of both justice and economic efficiency would suggest that the tax system should be neutral with respect to people’s freely made choices.

The implications for reform of North Carolina’s sales tax are straightforward.

Yes, both goods and services should be taxed, but only once and at a uniform rate. This means that sales taxes on all business-to-business sales should be abolished along with all differential excise taxes on tobacco, alcohol and entertainment. These kinds of taxes, often called sin taxes, are disrespectful of people’s freely made choices and represent an unwarranted interference with private decision making.

Considerations of tax reform should start with first principles, not with a desire to raise additional revenue. In a free society, and according to North Carolina’s own state constitution, those first principles are individual liberty and the right of each person to dispose of his or her income as he or she sees fit. It is these principles, and not strictly the desire to raise more revenue, that should guide any changes to North Carolina’s sales tax.

Roy Cordato, an economist, is vice president for research and resident scholar at the John Locke Foundation.

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