Dynamic scoring for sin taxes

What will happen if tax laws change? Republicans, newly in control of Congress, want to change the rules. Here are the stakes: the official predictions of what will happen determine whether a tax bill is a budget-buster – so maybe if it can pass or not.

CBO and Joint Tax have been not using, for budget purposes, so-called dynamic scoring, but the new 114th Congress is working on that.  “Current rules require calculating a policy’s direct cost to the government, which includes looking at how affected individuals and firms would react to the policy.  But dynamic scoring goes further by requiring that budget estimates also take into account how policies could affect the total size of the economy.”  http://www.whitehouse.gov/blog/2015/01/06/dynamic-scoring-not-answer

Here’s a political article ((with the term “voodoo scorekeeping”): http://thehill.com/blogs/floor-action/house/228684-house-adopts-dynamic-scoring-rule.  Here’ some background:

http://eml.berkeley.edu/~auerbach/dynamscor.pdf

http://www.nber.org/digest/jul05/w11000.html; http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2255708.

Disclosures:  I’m skeptical of dynamic scoring for budget purposes, but as a veteran of Joint Committee on Taxation orthodoxy, may be biased.  Note that “JCT and CBO sometimes provide supplemental analyses of the estimated macroeconomic effects of major legislation, such as immigration or tax reform proposals, but these analyses are not part of their budget estimates of the bills.” http://www.cbpp.org/cms/?fa=view&id=3598.  So it’s not that it’s wrong to look at all the ramifications.

What about sin taxes? Take alcohol taxes, for instance. Federal alcohol taxes have been shrinking in real terms since the Read My Lips tax increase passed in 1990. Wouldn’t raising alcohol taxes cut down on drinking and thereby reduce absenteeism, increase productivity, reduce hospitalization, and so on?  Name your elasticity of demand; raising alcohol taxes would seem to point in those directions. Some effect seems predictable. Sure, a tax hike would cut down work hours for emergency room personnel and substance abuse counselors in the long run. But the net effect should be to help the economy.

I’m not saying we should quantify the effect for budget purposes – it seems far too speculative. In fact, drinkers might turn to harder drugs, with a negative impact. But it’s worth thinking about. Thanks to Jon Caulkins of Carnegie-Mellon for getting me thinking about this.

A CBO report on tobacco doesn’t play the string out numerically all the way to the most speculative.  It may be as far as folks are willing to go.   http://www.cbo.gov/sites/default/files/cbofiles/attachments/06-13-Smoking_Reduction.pdf.

Here’s more about the economic effects of alcohol taxes: https://newrevenue.org/2015/01/25/alcohol-excises-lowry/.

 

 

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Author: patoglesby

From 1982 to 1990, I worked in tax policy for Committees of the United States Congress. In recent years, I was Adjunct Lecturer at UNC-Chapel Hill's Business School and then Adjunct Professor at its Law School.

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