You tax something you get less of it — it doesn’t only apply to undesirable behavior
On January 26, Gov. Tim Walz unveiled Minnesota’s COVID-19 Recovery Budget. Essentially, he is proposing to raise taxes and use the revenue to support higher spending on numerous programs. The governor wants to raise taxes on corporations and rich Minnesotans so they can pay their “fair share,” whatever “fair” is defined as.
For his ambitious plan to help the poor, his proposal is, however, swelling with taxes that will mostly fall on ordinary Minnesotans. As already illustrated by John Phelan, corporate and income taxes are passed on to individuals through higher prices and lower wages. The Minnesota Department of Revenue has evidence of this.
But what is perhaps more surprising in the budget is the plan to include a cigarette and vaping tax hike. Cigarette and vaping taxes are generally regressive — low and middle-income individuals pay more of their income on these taxes. So why are they in the proposal?
According to Walz, these taxes are okay because they will deter bad behavior. As explained by Revenue Commissioner Robert Dorty, raising taxes on cigarettes and vaping will induce people to smoke less.
There is indeed evidence that taxes/tax hikes on cigarettes discourage people from smoking. Additionally, high taxes on cigarettes increase smuggling by people who want to escape the tax and pay lower prices. This is not very surprising, and it highly supports the idea that “once you tax something, you get less of it.”
People respond to taxes
When taxes are high, people will look for ways to reduce costs, hence, a reduction in the taxed behavior. But if Walz is familiar enough with how taxes work, why is he pushing for ideas that are harmful to Minnesota’s economy?
By his own logic, taxes on income should have a deterrent effect on economic activity. Tax hikes increase the cost of doing business, starting a new business, expanding a business, or investing in productive activities. It is safe to say that on some level, Walz’s tax hike will curtail some of these activities. The magnitude of the effect will ultimately depend on how individuals respond to the tax.
Walz would rather let Minnesotans believe that taxing the “rich” comes at no price, which isn’t the case. In the same way that raising the tax on cigarettes reduces smoking, raising the income tax should also discourage income-producing activities. The logic applies across the board.