Currently I’ve been fascinated with the numerous ways by which members of the general public transfer funds to government and the numerous reasons for which such transfers are made. In any case, we’re still within the “season of giving.”[i]
Voluntary Payments
In some cases, the transfer is made voluntarily.
A business owner makes a payment to a neighborhood government[ii] in exchange for obtaining the federal government’s consent to a specific project – a classic quid pro quo. For instance, a developer agrees to dedicate land for a park; they grant a restrictive covenant on real property abutting land on which the developer plans to construct residences provided the developer can obtain the federal government’s zoning approval.[iii]
In a only a few instances, a person will contribute property to a government with respect to which the person will likely be entitled to say a charitable contribution deduction if the contribution is made exclusively for public purposes, with no expectation of receiving anything in return.[iv]
Way more ceaselessly, individuals will purchase government bonds and other securities, thereby making an interest-bearing loan to the federal government.
Involuntary Payments
Generally, nonetheless, a person’s transfer of funds to the federal government is made involuntarily.
As discussed in last week’s post,[v] members of a community can pay taxes in exchange for the services provided by the federal government having jurisdiction over that community – these taxes are the worth one pays for the privilege of residing, owning property, or doing business in the neighborhood.
Thus, depending upon the community, a member thereof could also be required to pay income, sales, property, transfer, employment, and other taxes to the local government to finance the activities during which that government is usually engaged or the services that it provides including, for instance, police and fire departments, schools and libraries, public works and maintenance reminiscent of bridges, roads, and parks, public transportation, courts and prisons, hospitals and ambulance services, social welfare programs, unemployment insurance, and other programs and services.
The person is required to pay these taxes without regard as to whether the taxpayer can discover a selected instance during which they’ve directly benefited from a specific government activity or service.[vi]
Conversely, a person could also be compelled to make a payment to the federal government if the person has engaged in activities that the general public has determined are illegal or otherwise detrimental to the community[vii] – semantics aside, these payments are known as fines.[viii] They’re punitive in nature and, in the event that they are steep enough, they could reach stopping the person from engaging in the identical activity in the longer term.
“Voluntary” Taxes?
Certain taxes are sometimes characterised as “voluntary.” Is there something intrinsically oxymoronic in regards to the notion of a voluntary tax? Or is it an issue of perspective?
Such taxes are knowingly paid by those individuals who affirmatively select to have interaction in a legally permissible activity, or to buy a legally available product, with respect to which the tax is imposed.
These taxes are to be distinguished from the tolls which can be “voluntarily” paid by individuals who select travel over certain bridges or on certain roads.[ix] Also they are different from the final sales taxes which can be imposed with respect to those consumer services and products that a person chooses to buy.
Tolls and sales taxes could also be described as “consumption” taxes which can be inherently broad-based and imposed for the aim of raising revenue.[x]
Nonetheless, the voluntary taxes to which I’m referring should not typically utilized for the aim of collecting revenue. As an alternative, they more closely resemble a advantageous, not less than conceptually, because they’re intended to dissuade a person from engaging in what society has determined is lower than “optimal” behavior.
For instance, so-called “sin taxes” are a type of excise tax that, not less than in theory, seek to make a selected product, like alcohol or tobacco, so expensive that the patron cannot afford it and consequently will forego its purchase and consumption.
In turn, the revenue generated by sin taxes is commonly dedicated to a specific government program that is normally targeted at redressing the hostile consequences experienced each by individuals who previously engaged within the activity or used the product in query, in addition to by those that proceed to achieve this.
No Longer a Sin
Which brings us to the existential query: what happens when a product or activity isn’t any longer “sinful” but continues to be taxed as if it were? Stated otherwise, does the erstwhile sin tax turn out to be a consumption tax that’s imposed as a revenue raiser?
Cannabis
Let’s consider Recent York’s recently enacted taxes on (a) the sale of recreational cannabis, which was legalized in March of 2021,[xi] and (b) online sports betting, which was launched in January of 2022, plus (c) one long-standing voluntary “tax” that has only rarely been characterised as such – the Lottery.
Former Governor Cuomo’s reasoning for legalizing recreational cannabis in Recent York was illuminating. During one interview, the then governor explained that “cash-strapped Recent York” was “ripe” for the picking when it got here to legalizing marijuana for public sale and distribution.[xii]
When asked about Recent Jersey’s successful referendum permitting the sale and recreational use of cannabis, Cuomo responded that “the query becomes in regards to the money and the distribution and the facility.” He added, “I believe this yr (2021) it’s ripe, since the state goes to be desperate for funding.”
Cuomo then stated that “the pressure goes to be on” the legislature in Albany to legalize cannabis and to reap the financial advantages of doing so through state taxes and license fees. In truth, the state hopes to clear about $1.25 billion over the subsequent six years.
Online Gambling
Let’s compare Recent York’s approach to online sports gambling. A couple of months after the state legalized mobile sports betting, the State Gaming Commission endorsed the approval of long-term licenses for certain gambling corporations.
“The advice,” the Commission stated, “comes after years of delays as Recent York’s neighbors have raked in buckets on their legalized gambling operations. And Recent York has missed out on that revenue in additional ways than one: it’s estimated that 20% of Recent Jersey’s sports gamblers are Recent Yorkers hopping the Hudson River.”[xiii]
I suppose the Commission should have been onto something because, notwithstanding a whopping 51 percent tax on gross gambling revenues,[xiv] Recent York has changed into the mother of all bookmaking markets.[xv] In truth, the state’s online gambling program has been so successful that Governor Hochul has made noise about expanding brick-and-mortar casinos.
The Lottery
Recent York Lottery claims to be the most important and most profitable lottery within the country. Indeed, in accordance with its website, the Lottery contributes billions of dollars annually help fund education within the Empire State.
These folks are pros. For instance, the Lottery offers subscriptions to the gambling public “so that you won’t ever miss a high jackpot.” What’s more, it offers free interpretation services, thereby removing one’s limited proficiency in English as an obstacle to gambling away one’s money.
But haven’t any fear. The Lottery’s Responsible Gaming Program is devoted to providing members of the general public with the data they should make educated decisions in regards to the “product” they’re buying.
That said, it seems that “state lotteries across the country are supported largely by people who find themselves least in a position to afford it.”[xvi]
Where’s It Going?
Based on the governor’s office, the tax revenue from online sports wagering is to be invested in elementary and secondary education and grants for youth sports programming, together with problem gambling prevention, treatment, and recovery services.
Even though it stays to be seen whether cannabis sales will turn into the money cow that Albany envisions, Hochul’s administration has announced that the tax dollars collected from sales of cannabis will likely be slated for education, community reinvestment, and drug treatment.[xvii]
Lottery revenue, as most of us know, is distributed to local school districts.
History Repeated?
Even though it stays to be seen just how harmful and/or successful the legalization and taxation of online gambling and recreational cannabis will ultimately be, our experience with certain existing excise taxes could also be instructive.
Once upon a time, the notion of imposing a tax on the sale or use of cannabis would have elicited comparisons to the state’s tax on the sale of cigarettes, which is currently set at $4.35 per package of 20 cigarettes (add one other $1.50 within the City), or its tax on alcoholic beverages (the speed varies in accordance with the drink).
The cigarette tax is characterised as an excise tax, meaning the imposition of the tax is meant, not less than ostensibly, to dissuade individuals from purchasing cigarettes and, thereby, to assist them quit smoking. As well as, the tax proceeds collected from the sale of cigarettes are directed toward anti-tobacco and cessation programs.
Nonetheless, query how successful the cigarette tax has been in curbing smoking. From an economic perspective, the concept increasing the worth to the purpose of creating it “too expensive” to buy cigarettes misses the mark.
It’s one thing to extend the worth of pizza or cheeseburgers – heaven forbid that such a calamity should ever befall us – to the purpose where demand falls off precipitously; the so-called “demand curve” for such delicacies[xviii] is elastic (not less than for many of us).
It’s one other thing to think that increasing the worth of addictive substances or addictive behaviors, for which the demand curve is by definition relatively inelastic, can have the identical effect – such pondering is more likely to fail.
As an alternative, isn’t it more likely that customers of such “products” will search out inexpensive alternatives, even from illegal sources? In truth, Recent York’s high tax on cigarettes has created a thriving black market.[xix]
What can Recent York’s taxing authority expect from the sale of cannabis when the state’s “legal cannabis will likely be taxed twice – a potency levy on distributors on top of a 13% retail tax that might push the effective rate to as high as 50% or more on edibles”?[xx]
Within the Village, Washington Square Park has already changed into what has been described as “an open-air bazaar of illegal cannabis sales.”[xxi]
Furthermore, if California’s experience has taught us anything, legal cannabis businesses will likely be hard-pressed to survive in a regulated and high-tax environment within the face of competition from an already established, fairly sophisticated, and inexpensive illegal market.
As for gambling, “[o]f course, . . .the illegal sports betting market has been in place and thriving within the U.S. for many years, despite the proven fact that it’s yes, illegal.” Still, some analysts imagine that “the legal wagering market could well grow to not less than $55 billion within the U.S. alone by the top of this decade. And that figure could well be a conservative projection — a very conservative projection — given the burgeoning interest in each sports and sports betting amongst Americans.”[xxii]
Thanks for Your Voluntary Payment of Tax
Assuming that Recent York’s experiment with taxing cannabis sales and online gambling in some way succeeds, to whom would the “credit” for the success likely be attributed? Stated otherwise, what’s the demographic makeup of the individuals who’re more likely to use cannabis products or who will gamble online?
Seems, by and huge, it’s among the same folks who’ve been wholeheartedly participating in Recent York’s Lottery for years – young, male, Black, and Native American individuals and individuals with low educational attainment and income are more likely to have interaction in higher frequency cannabis use.[xxiii]
A few of these demographic characteristics are also reflected within the consumption of cigarettes. Thus, individuals with low educational attainment and income were more more likely to smoke cigarettes, as are individuals with disabilities.[xxiv]
Men are more likely than women (24% vs. 15%) to say they’ve bet on sports in some form up to now yr, as are adults under the age of fifty when put next with those 50 and older (22% vs. 17%). There are also differences by race and ethnicity: Black (27%) and Hispanic adults (24%) are more likely than White (18%) and Asian American adults (10%) to report doing so. There aren’t any significant differences in self-reported sports betting by educational attainment or household income level.[xxv]
Based on the foregoing, it seems that legalizing what was previously a “sinful” product or activity for the aim of taxing such product or activity is not going to eliminate the unregulated and “untaxed” sale thereof.
Furthermore, to the extent taxes are collected from such activities, such taxes will likely be borne by those that are least in a position to afford them.
What gives?
Completely happy Recent Yr.
[i] Or should I say, “the season of returning and/or exchanging for something else”?
[ii] As distinguished from a political contribution to an elected official’s campaign treasury.
[iii] The quid pro quo defeats the otherwise available deduction under IRC Sec. 170(h) – a mainly, a so-called conservation easement.
[iv] IRC Sec. 170(c)(1).
If the grant is in the shape of a conservation easement, the deduction must account for (and be reduced by) any resulting increase in value realized by other property owned by the person. For instance, assume a person owns two adjoining waterfront lots that could be developed as of right. The owner grants a conservation easement on one in all the lots such that it can’t be developed in the longer term. The worth of the restricted lot decreases but the worth of the owner’s other lot may increase in consequence of the restriction.
[v] https://www.taxslaw.com/2022/12/pigs-get-fed-and-pay-their-taxes-but-hogs-that-remains-to-be-seen/.
[vi] Hopefully, one won’t ever need the help of the police or fire department, nevertheless it’s good to know they’re there. In some communities, residents who wouldn’t have children or who send their children to personal schools argue that their property taxes – which are sometimes earmarked to fund local public education – needs to be reduced because they don’t receive any profit therefrom. For higher or worse, nonetheless, where one stands on a problem will often rely upon where one sits.
[vii] For instance, traffic violations.
[viii] Old tax joke: a tax is a advantageous for doing well, and a advantageous is a tax for doing improper. I’m here all week.
[ix] How voluntary is a toll, from a practical perspective? It isn’t. It’s also removed from progressive – how does Albany feel about that?
[x] The sales tax base varies from state to state. Many imagine that the bottom must be expanded to cover more services in light of our economy having shifted from one which is predicated on manufacturing to at least one that is predicated on services.
[xi] Recent York issued 36 licenses for the retail sale of cannabis products in November of 2022. The state plans to issue 175 licenses in all.
[xii] https://www.amny.com/politics/cuomo-conditions-ripe-marijuana-legalization-2021/.
[xiii] https://www.forbes.com/sites/qai/2021/11/12/new-york-takes-a-gamble-with-51-tax-on-online-sports-betting/?sh=7dd0ce76e55a.
[xiv] Bets received minus winnings paid.
[xv] https://www.nytimes.com/2022/02/22/nyregion/sports-betting-ny.html.
[xvi] https://www.opb.org/article/2022/08/09/new-research-shows-lotteries-rely-on-low-income-players/. Based on this study, lotteries are found “in 45 states plus the District of Columbia. . . It’s big money. In 2020 – the most recent years for which we had aggregated figures – something like 82 billion dollars were spent on ticket sales for lotteries.”
[xvii] After all, there’s the argument that the legalization will profit “justice-involved” individuals. Recall that 175 licenses will likely be issued – what number of” justice-involved” individuals will these 175 licenses profit? Nevertheless, if this system fails for economic reasons – witness California’s troubles – a lot for “justice.”
[xviii] Don’t yuck my yum.
[xix]https://www.pressrepublican.com/news/local_news/new-yorks-high-cigarette-taxes-fuel-black-market-sales/article_e111a537-55b4-518f-91fe-6dd57269e8b9.html .
[xx] https://www.bloomberg.com/news/articles/2022-12-29/nyc-s-housing-works-aims-for-1-million-in-sales-at-city-s-first-legal-pot-shop.
[xxi] https://www.nytimes.com/2022/03/13/nyregion/weed-washington-square-park.html.
[xxii] https://medium.com/modern-business/the-young-demo-of-online-sports-betting-c595f7dcefaa.
[xxiii] https://jamanetwork.com/journals/jamanetworkopen/fullarticle/2786687.
[xxiv] https://www.cdc.gov/tobacco/campaign/suggestions/resources/data/cigarette-smoking-in-united-states.html#by_race.
[xxv] https://www.pewresearch.org/fact-tank/2022/09/14/as-more-states-legalize-the-practice-19-of-u-s-adults-say-they-have-bet-money-on-sports-in-the-past-year/#:~:text=17%25).,attainment%20or%20household%20income%20level.