Excise taxes are commonly employed to deter consumption or internalize societal costs, but in West Virginia, Gov. Jim Justice (R) is proposing to increase the excise tax on soft drinks to pay for part of an income tax reform. buff.ly/3wcSIgu @UBoesen
He’s not alone in considering ways to raise revenue as state lawmakers look to a time after the pandemic and ponder how their tax codes impact taxpayer behavior.
It seems almost certain, for example, that the post-pandemic world will include more remote work opportunities, which will allow taxpayers more freedom to shop for competitive tax environments with less considerations of the physical location of their employer.
In West Virginia, the only state to lose population over the past 70 years, several plans are in the works to reduce or even repeal the individual income tax.
The governor’s proposal has one uniquely interesting element: increasing excise taxes on soft drinks. West Virginia’s soft drinks tax is a curious corner of the state’s tax code, but the excise tax celebrates its 70th anniversary this year.
Excise taxes can function well when internalizing societal costs, called externalities, or when establishing a user-pays system. However, excise taxes are poorly suited to sustainably generate operating revenues.
By definition, such taxes are narrow and selective, and they lack revenue stability, especially when imposed on declining markets.
Policymakers should be very cautious about relying too heavily on excise tax increases to pay down tax reductions elsewhere.

Ideally, revenue offsets would come from more stable, broader-based revenue sources.

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More from @TaxFoundation

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The legalization and taxation of recreational marijuana remains one of the hottest trends in state taxation.

Currently, 16 states and D.C. have passed bills or approved ballot measures that allow for the sale of recreational marijuana: tax.foundation/3cFu2Wm Image
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