Desperate for Tax Revenues

On April 16, 2008, Maine enacted a law that doubles its beer and wine excise taxes and creates a new tax on soda syrup (LD 2247, Chapter 629). The syrup tax is $4/gallon and 42 cents/gallon of bottled soft drinks and those made from powder (see 4/17/08 article in the Portland Press Herald). The revenues will be used for the state's health insurance program called Dirigo. One estimate is that the syrup tax will mean about $28K of new taxes for an average McDonald's.
The new law defines soft drink broadly as "any nonalcoholic beverage, whether naturally or artificially flavored, whether carbonated or noncarbonated, sold for human consumption, including, but not limited to, soda water, cola and other flavored drinks, any fruit or vegetable drink containing 10% or less of natural fruit juice or natural vegetable juice and all other drinks and beverages commonly referred to as soft drinks, but not including coffee or tea unless the coffee or tea is bottled as a liquid for sale." Unflavored water and milk are exempted.

"Syrup" means "the liquid mixture of basic ingredients used in making, mixing or compounding soft drinks by mixing the syrup with water, simple syrup, ice, fruits, vegetables, fruit juice, vegetable juice or any other product suitable to make a soft drink."

Was this a good idea? The legislators and governor appear to have needed funds for the health insurance plan. Despite wide consumption, alcohol and soft drinks are not viewed as necessities of life so taxing them migh be justified in the public's eye. But what about other things people consume that also are not necessities of life, such as bottled water, soft drinks with less than 100% natural juice, candy, pastries, and more?

Unfortunately, desperate needs for revenue usually don't lead to the best tax system modifications. The new law in Maine also earmarks the new tax revenue rather than having it go to the general fund. Earmarking is not a good idea when there is no connection between the taxed item or activity and where the revenue goes. Also, should sales of beer, wine and soft drinks decline, the health plan will suffer.

There may be some tax gap issues with the tax as well because it will be easy for Maine residents living close to New Hampshire to purchase wine, beer and soft drinks in that state. Legal issues can also arise with new narrow taxes. For example, if a state prohibits taxation of food, an excise tax on soda might not be permited (depending on definitions and the nature of the tax).

What would be a better approach? When revenues are not sufficient to match state spending, spending should be reviewed to see if it can be reduced. If that doesn't work, the state should review its overall tax system to see if there has been erosion in any tax base. For example, perhaps its sales tax only applies to tangible personal property. If so, it has eroded because today, consumption of services and intangibles (such as digital goods) has increased while consumption of tangible personal property has declined. Adjustments to existing taxes tend to keep the overall system simpler by not creating new taxes to comply with.

Maine is not alone in being desperate for revenues. California has tried to impose a higher income tax on oil companies and increase the tax on beer to help address its significant budget shortfalls. Time spent on these endeavors would be better spent on looking for appropriate and feasible spending reductions and improvements to a state's overall tax structure. Singling out one industry or one product that might be viewed as sinful or bad as a way to solve budget problems is ill-advised as it can complicate the tax law, make the tax system inequitable, and most importantly, ignores the structural problems that are more difficult to solve, but need to be solved, rather than left for another day.