The Detroit News, January 28, 2005

Detroit is facing serious budget issues, and Mayor Kwame Kilpatrick has proposed that one way to fill in the budget holes is to boost taxes. His proposal includes a 1 percent increase in local taxes on liquor, tobacco and fast foods.

Talk of raising taxes during a budget crisis is not new for any government, but there are a number of reasons why such a tax increase may do more harm than good. Further, it isn't clear whether the mayor's proposed "sin tax" on such "vice" items is simply a way to increase tax revenue, or if it also aims to promote public health.

Regardless, history has shown that sin taxes don't work.

Puritan New England had many laws to control sin, ranging from taxes to prohibition. America's own experiment with prohibition in the early 20th century proved that outlawing a "vice" product such as alcohol ultimately would not deter its manufacture, sale or consumption.

There are a number of modern day examples that illustrate the problems with taxing vice items.

Between 1984 and 1993, Canada doubled its tax on cigarettes with the goal of reducing smoking and increasing tax revenues. According to the Pacific Research Institute, a think tank in California, the tax did not generate the expected results.

A large percentage of Canada's cigarettes were sold on the black market, thwarting the government's attempt to raise revenues According to PRI, similar evidence of the harm of increasing cigarette taxes can be found in this country. The institute reports that "in 1995, one year after Michigan raised its cigarette tax, low-tax states within a one-day drive saw an increase in their cigarette sales -- ranging from 4.5 percent to 12 percent."

And like Canada, California saw an increase in black market cigarette sales after it raised its tax in 1988.

At the local level, Detroit should consider the case of New York City. Due to New York City's high combined state and local cigarette tax, the Cato Institute reported that "Consumers have responded by turning to the city's bustling black market and other low-tax sources of cigarettes."

The black market took away significant funds from legitimate businesses and potential tax dollars from government. Worse yet, the institute reported a rise in crime -- including armed robbery and violence against retail stores and truck drivers.

Certainly similar problems could arise in Detroit.

The scenarios are also applicable to liquor sales. Illegal sales and activities could divert revenues from businesses in the city to those outside of its limits or other states.

The consequences of a fast food tax are perhaps more difficult to predict. But such a tax could have two outcomes.

First, it will eat away at the limited incomes of those who patronize fast food establishments -- including teens and low-income families. Second, a fast food tax may decrease sales at such establishments, reducing the number of jobs that are typically filled by teens and others who lack skills for higher-paying jobs.

Imposing such a tax would be a serious mistake.

According to the Wall Street Journal, in 2000, Detroit residents had the 10th highest tax burden among U.S. cities. Property tax rates are twice as high as the national average. The new taxes would add to this burden.

Finally, such a tax would cause more Detroiters to shop in suburban stores and encourage more businesses to leave the city at a time when we need all the new businesses we can get. It would also cause future businesses not to locate in Detroit.

After all, Detroit already has an unpopular income tax that discourages some businesses from locating in the city.

Bottom line: Such policy discourages shopping and commerce in Detroit, at a time when government needs to be building the city's economy and future well-being.

(A new tax) will eat away at the limited incomes of those who patronize fast food establishments -- including teens and low-income families.