Problem of Earmarking Tax Revenues

When we pay taxes, we likely think they are funding government based on the spending recommendations of elected officials as informed by the government agencies, such as the Dept. of Education, that propose budgets for funding. But this is not true for all tax revenues because some are earmarked to go to certain funds. One that might come to mind are gasoline excise taxes that primarily fund the Highway Trust Fund to build and maintain roads. 

States also have various taxes often earmarked for particular causes. For example, in 1998, California voters passed Prop 10 to add a 50 cent excise tax on a pack of cigarettes. This additional tobacco excise tax was earmarked for the newly created California Children and Families First Commission for various education, health and child care projects to help children.

On July 21, 2023, CalMatters, a nonpartisan, nonprofit news organization, reported: "Californians are smoking less: Why that's a problem for these early childhood services." They report that by 2026, First 5 Association of California expects 30% less revenue compared to 2021. The First 5 program in Kern County also notes the funding decline in its 2022-2023 report, resulting in less services for children 5 and under.

So, it's good that fewer people are smoking, but important programs lose funding as a result. What an odd system!

And the oddity can go the other way as well. For example, the federal gasoline excise tax has been 18.3 cents/gallon since 1993 and is not adjusted for inflation or that fact that cars are more fuel efficient and electric cars don't pay this tax. Money has to be transferred from the General Fund to try to fund highway projects. That begs the question, why not just get rid of the excise tax and fund the roads from the General Fund?

How will the programs for children continue to run with reduced revenue due to reduced tobacco taxes?

There are many options including cutting some other spending that is not needed, reducing the number of tax breaks such as not charging sales tax on digital goods, entertainment, personal services and household utilities. Reducing the number of income tax breaks such as a mortgage interest deduction for a vacation home or home equity loan.

Why did the earmarking occur? Possibly it is easier to enact the new tax when people know a specific purpose it will serve. But as evidenced by the drop in tobacco taxes, it is not a reliable source for funding important programs.

What do you think should be done?

CA Prop 29 cigarette tax increase defeated

One of the statewide propositions on the June 2012 California ballot was Prop 29 to increase the cigarette excise tax by $1/pack. Per information on the CA Secretary of State website, the extra funds would "be dedicated to fund cancer and tobacco-related disease research and tobacco prevention and cessation programs."  The initiative was supported by the American Cancer Society, American Lung Association and American Heart Association, among others. It was opposed by tobacco companies, Californians Against Out-of-Control Taxes and Spending, California Taxpayers Association, and others.

Prop 29 was narrowly defeated - 50.9% to 49.1%. Reuters reports that opponents spent about $47 million and proponents about $12 million (Christie, "California voters reject raising tobacco tax," 6/7/12).  That sounds to me like $59 million that could have gone to cancer research rather than an initiative that violates principles of good tax policy.

The significant problem with Prop 29 is that it would earmark the tax dollars for a specific purpose rather than place them in the General Fund. That is not the way to design a tax system or a government budget. Why should cancer research spending be tied to whether people keep on buying cigarettes?  While I think all of California's "sin" taxes should be reviewed periodically to determine if they should be increased or otherwise modified, any revenues should go into the General Fund. We should not be binding the hands of the legislators.  California already has a lot of constraints on the budget process (such as Prop 98) rather than trusting the elected officials to create an appropriate budget. 

A report on problems of earmarking taxes was released in May 2012 by George Mason University. The report, by economists George R. Crowley and Adam J. Hoffe, is entitled, Dedicating Tax Revenue: Constraining Government or Masking Its Growth?  The first paragraph of their report notes additional problems with earmarking taxes:

"Evidence shows that tax revenues dedicated to politically popular expenditures like education or highways are used to increase general fund revenues and overall government size rather than for the intended purpose. Dedicated, or “earmarked” tax revenues, are generally ineffective in increasing expenditures for the program they are tied to, and they successfully increase total government spending."

What do you think?