The voices of Tax Policy Center's researchers and staff
If you are a regular reader the Tax Policy Center’s morning news summary, the Daily Deduction, you’ve probably noticed a fascinating trend: The rise of unconventional state and local taxes. We all know about income, sales, and property taxes. But in recent years, we’ve seen growing interest in head taxes, parcel taxes, sugar taxes, marijuana taxes, developer taxes, tourist taxes, and sports betting taxes.
The names are unfamiliar and bewildering, and perhaps that’s not an accident. These taxes seem to have four things in common: They often tax people only indirectly. They tax only a narrow slice of a local economy. They supplement broad-based taxes that nearly everyone pays and most voters seem to hate. And some of these levies impose a greater burden on low-income residents than on middle- or upper income households.
These taxes are not new by any means. The modern trend probably began with the rise of instant lotteries in the 1970s. Those now-ubiquitous government-run betting pools that brought in more than $80 billion in 2016 are effectively a tax on (mostly) low-income households. The lotteries were followed quickly by a burst of legalized—and taxed—casino gambling starting in the late 1970s. Hotel “bed taxes” first become popular about the same time.
But recent years have seen an explosion of other taxes. They represent only a small fraction of total state and local revenue, but the growing interest on the part of government officials is undeniable.
What are they, and what accounts for them?
Let’s look at just a few.
Head taxes. These are based on the number of workers on a company’s payroll. The idea of a flat per-person tax goes back to the Book of Exodus, but the modern version targets only labor in large firms. Denver has one. Chicago had one but repealed it. Pittsburgh taxes total employee compensation. Seattle had a head tax from 2006-2009, repealed it, adopted another one a month ago, then repealed it that version this week in the face of strong opposition from Amazon and other employers. At least two California cities, Mountain View and Cupertino, are considering such a levy.
The other “head tax.” States have taxed pot since California legalized medical marijuana in 1996, but the real revenue started flowing in 2012 when Colorado and Washington fully legalized marijuana and created excise taxes on the weed. Now, 30 states have legalized—and many of those have taxed--pot. Just since 2016, a dozen states have either OK’d or implemented taxed sales of marijuana. Last year alone, Colorado collected $250 million in taxes and fees on weed. Like post- Prohibition alcohol taxes, states are going where the money is.
Gambling taxes. When the US Supreme Court greenlighted the ability of states to legalize—and tax-- sports betting last month, states saw a new cash cow. Today, New Jersey will open its casino-based sports books. However, the business may not be the revenue jackpot officials predict.
Parcel taxes. Unlike traditional property taxes that are based on assessed value, a parcel tax is a flat tax on every landowner. It is sometimes linked to the property’s size or its improvements. Since California enacted property tax limits a half-century ago, local government have been attracted to the tax as a way to pay for public schools. However, in recent months the levy has enjoyed a burst of interest. Just this week, San Francisco and Manhattan Beach adopted parcel taxes. Fresno will soon consider one.
Why are these taxes so popular? Here are a few possible reasons:
Legal constraints on traditional taxes. California has capped property taxes so cities and counties had little choice but to turn to alternatives such as parcel taxes. Colorado capped most traditional taxes so it legalized and taxed marijuana sales. Seattle is prohibited by the State of Washington from enacting an income tax so it (briefly) turned to its head tax. Faced with these constraints, governments go where they can for revenue.
Governments are maxxing out on traditional taxes. There are many reasons. As the economy becomes more service-oriented, the sales tax base that is built largely on manufactured goods is shrinking. States have lost tax revenue as more goods are purchased online, where states are limited in their ability to require retailers to collect sales taxes.
At the same time, states have been raising sales tax rates and cutting income taxes. The former makes it tougher for local governments to raise their own sales taxes. In Seattle, for examples, consumers are paying a combined sales tax rate of 10.1 percent. It is hard to squeeze much more from a relatively narrow tax base.
Taxing that fella behind the tree. Tourist taxes on consumers in restaurants, hotels, and—increasingly-- short-term web-based rentals, frequently hit non-residents. And they rarely vote where they visit. Gambling and cigarette taxes fall on a relatively narrow share of the population.
Alternative taxes are less salient. Economic research shows that people are more willing to pay taxes if they can’t see them. Thus, state and local governments are increasingly fond of indirect taxes. For example, Philadelphia is considering a new tax on real estate developers. That levy surely will be passed on to commercial or residential tenants, or to buyers. But it will be buried in the price, and invisible to most voters. It was the same with the head tax. A small per-employee tax eventually will be passed on to workers, perhaps in the form of lower pay or fewer job opportunities. But it will be largely invisible.
Cities and states need revenue to pay for services their residents want. But if voters won’t support traditional income, property, or sales taxes, don’t be surprised when elected officials find new taxes to pay the bills.
CORRECTION: Several readers pointed out that not all states that have legalized medical mairjuana tax on that product. Recreational marijuana is taxed. We have corrected the text above.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Mathew Sumner, file/AP Photo