5-8-15 – Taxing the Working-Class

by Hayden Dublois
On Friday, May 1, the Vermont House of Representatives passed a $12 million health care bill. While the legislation was intended to improve access to primary care for low and middle-income Vermonters, the bill also included a series of taxes that will disproportionately hurt those very same Vermonters. The Legislature has previously been keen on taxing high-income earners and business, which is not surprising given the political make-up of the legislative body. However, the irony now appears to be that many of the same legislators—including prominent Progressives and Democrats—who have called for taxing the rich and addressing issues that impact the poor (such as income inequality and the minimum wage) now seem to have voted for a series of tax hikes that will have a detrimental impact on those same low-income Vermonters that they have worked to “protect”. Only an understanding of basic economics is needed to understand the negative impact of these tax hikes on Vermont’s working class population.
The health care bill included expanding existing taxes and levying new taxes on a variety of products: soft drinks, candy, vending machine products, tobacco, and electronic-cigarettes/vapor products (the e-cigarette tax would be levied at an astonishing rate of 46%). These new taxes disproportionately hurt low-income, working-class Vermonters in three ways. First, the taxes are, by definition, regressive—that is, relative to an individual’s income, they impact Vermonters at the lower-end of the income distribution scale to a greater extent than Vermonters who earn a higher income. Why? These taxes take the form of excise taxes levied on consumable goods. Lower-income individuals tend to have what economists call a greater “propensity to consume”. That is, for individuals who earn a lower income, spending on consumable goods tends to make up a higher percentage of their income than it does for higher-income earners who have a greater amount to devote to savings and investment. Thus, Vermonters who earn a lower income spend a greater proportion of their income on consumable goods—like candy and soda—than do wealthy Vermonters, who devote a greater percentage of their income to savings and investments. The taxes levied on these consumable goods directly impact those same Vermonters who spend a greater percentage of their income on consumption.
This brings me to my second point: not only are these taxes levied on consumable goods which hurt low income Vermonters, but many of these specific goods—such as cigarettes and candy—are items of more frequent purchase by the working class than by the upper class. A recent study in Population Health Metrics confirms that tobacco-smoking rates tend to persist more strongly among low-income communities. Low-income Vermonters who purchase tobacco and sugary-products to a greater extent than do wealthy Vermonters will be disproportionately hurt by these new taxes, which are primarily levied on these two types of products.
Finally, the goods in these type of markets tend to have what economists call an “inelastic demand”. That is, a change in the price of these products (i.e. a price increase caused by a tax hike) does not cause a significant change in consumption, so the burden of the tax lies on consumers who wind up bearing a greater proportion of the tax incidence than retailers do. Because cigarettes are addictive, for example, a tax hike isn’t going to incentivize a life-long smoker to suddenly stop smoking. Working-class consumers of cigarettes will simply absorb a higher price than they otherwise would have. Thus, regardless of whether the tax is levied at the retailer or consumer level, the cost will be passed along to consumers. Another irony is immediately apparent: many of the same people who advocated for these taxes did so on the grounds of encouraging healthy behavior. The truth of the matter is that a tax on addictive products is not simply going to cause someone to change their behavior. An addict would be willing to pay a higher price to get his or her fix. Spreading the knowledge of health risks by engaging in these activities is, frankly, a much more effective way to encourage healthy behavior than is hiking taxes on people who will continue to consume these goods anyway.
Because low-income Vermonters exhibit a greater marginal propensity to consume, spend a greater percentage of their consumption on cigarettes and sugary goods, and convey very inelastic demand for these products, these new taxes will overwhelmingly impact low-income Vermonters to a greater degree than they will wealthy Vermonters. Governor Shumlin apparently recognized this a few years back. Quoting a Burlington Free Press article, “The Shumlin administration also argues the cigarette tax is regressive, meaning it has a higher impact on low-income Vermonters.” The same is true for a candy, beverage, e-cigarette, and vending machine tax. Hopefully the Governor’s attitude on this issue has not changed. How Vermont Progressives and liberal Democrats—the self-proclaimed protectors of the working class—could support such a bill is beyond my imagination. Or, perhaps it is an indication of an utter lack of knowledge of basic microeconomics. Regardless of their reasoning, Rep. Chris Pearson, leader of the Progressive Caucus in the House, certainly has a lot of explaining to do to his political base for his “yes” vote on this legislation—as do the many Democrats and Progressives, and handful of Republicans and Independents, who voted for this legislation. Meanwhile, it appears that Vermont’s desire for taxation has grown beyond the confines of taxing “the wealthy” and “big business” to the new realm of the poor and working-class. The only question that remains is, “who will they tax next?”
– Hayden Dublois, of Manchester, is an economics student at Middlebury College.

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