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Ohio Gov. Mike DeWine is proposing to create a child tax credit and to pay for it with increased “sin taxes” on tobacco.
According to one analysis, the tax credit is expected to produce big gains for the state. Economists overwhelmingly agree on a second benefit — that taxes themselves on things like tobacco, gambling, and marijuana can reduce harmful behaviors, according to a survey of economists that was released on Tuesday.
However, they said, those taxes would fall most heavily on the group that DeWine’s tax credit is meant to help — the poor.
Under DeWine’s proposal, families with children six and younger would be eligible for the $1,000 per-child tax credit. For couples filing jointly, benefits would begin to phase out at $75,000 a year in household earnings and stop altogether at $94,000. Those amounts would be lower for other filers.
DeWine proposes to cover the $450 million annual cost of the tax credit by increasing taxes on tobacco.
The cost of the proposal would be swamped by the $740 million in benefits it would produce for the Ohio economy by increasing future earnings, decreasing crime, and other beneficial outcomes, according to a paper by Scioto Analysis.
This week, the firm asked a panel of 17 Ohio economists whether “increasing taxes on cannabis, gambling, and tobacco will reduce negative externalities stemming from their respective markets.”
In economics, a negative externality is a cost from a transaction that is inflicted on parties not involved in it. Think toxins released from a fracking pad into groundwater used by farms and people in the surrounding area. In the case of pot, cigarettes, and gambling, externalities might include things like earlier death, increased health costs, bankruptcies, and lost productivity.
In the survey published Tuesday, 15 economists said such problems would be reduced by increased sin taxes, one disagreed, and one was uncertain.
In the comment section of the survey, most of the economists’ agreements came with caveats.
“Increasing the tax will reduce the behavior (and thereby reduce the negative externalities),” wrote Kathryn Wilson of Kent State University. “How much of an effect the tax has depends on how price sensitive consumers are when it comes to cannabis, gambling, and tobacco. It is important to keep in mind, though, that economic theory also says that a tax can be too high (if it is higher than the marginal negative externality) and result in less well-being in society.”
Jonathan Andreas of Bluffton University cited a negative outcome too-high taxes could produce.
“My only caveat is that excessively high taxes can shift the industry towards illegal organized crime who are able to escape the tax and that can cause worse externalities than a legal, regulated industry, but many states already have effective cigarette tax rates exceeding 100%, so 40% should be doable unless our criminal justice system is much less effective than in other states,” he wrote.
However, Charles Kroncke of Mount St. Joseph University disagreed that increasing sin taxes would reduce negative consequences for everybody else. Working at an institution located just north of the Ohio River, he might have been aware that Cincinnatians have for generations been crossing the bridge into Kentucky for cheaper booze and smokes.
“Negative externality will not be reduced if neighboring states have significantly lower excise taxes,” Kroncke wrote. “Ohio consumers will buy from out of state.”
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The panel was more split when asked whether it agreed that “increasing taxes on cannabis, gambling, and tobacco will disproportionately harm low-income households.” Nine agreed, four disagreed and two were uncertain.
While their answers were divided, in their written comments the economists expressed more nuance.
“If by ‘harm’ we mean put stress on household budgets, then yes, as we know smoking is more common in lower-income households,” wrote Christian Imboden of Bowling Green State University, who agreed that increasing sin taxes would harm poor families. “But in response to higher taxes, users may reduce uptake of these products or not become addicted in the first place, so the dynamics are complicated.”
Michael Jones of the University of Cincinnati disagreed that sin taxes would disproportionately harm the poor. But his written comment was similar to that of Imboden.
“Increasing taxes on cannabis and tobacco will reduce the overall usage of these products among low-income households,” Jones wrote. “Individuals who eliminate tobacco use see significantly better health outcomes and quality of life.”
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