Tax Makes Fiji Water Turn off the Tap

States are beginning to tackle the colossal budget mess awaiting them this coming fiscal year, thankfully mostly through spending cuts than tax hikes. Still, legislators in several states have turned to a classic tool of the revenue-hungry legislator that’s out of ideas: raising sin taxes. Sure, taxes on cigarettes, alcohol, and now even bottled water seem like a quick and easy way to offload the burden of government on an unpopular minority. But such taxes do more than keep products the government disapproves of out of consumers’ hands – they hurt the economy and kill jobs.

My favorite recent example is from the tiny Pacific island nation of Fiji, where bottled water firm Fiji Water is planning to leave the country due to a $0.15 per liter tax on large-scale bottled water operators (in reality, just Fiji Water) instituted by the country’s military government. Fiji’s government is desperate for revenue following years of economic stagnation, and the only response it seems able to come up with is biting the hand that feeds it – productive enterprises like Fiji Water.

This doesn’t mean that a military dictatorship is going to punitively target bottled water companies in America. But it points to the unintended economic damage sin taxes has on business everywhere. In Chicago, where a bottled water tax was instituted in 2008, retailers reported a marked fall in sales as consumers drove outside the city to make their water purchases. The drop in sales may have something to do with the consistent failure of revenues to meet predictions; while the city expected $10.5 million in revenues in 2008, it brought in only $7.5 million, and under $7 million the next year.

Lifting punitive sin taxes, by contrast, can bring an economic windfall to struggling local businesses. In Massachusetts, which repealed its alcohol sales tax by referendum last November, alcohol retailers have seen a boom in activity:

Business at Bender’s store, a quarter-mile from the Rhode Island border, dropped about 2 percent when the sales tax on alcohol was added in 2009, he said. Less people came, and those who did bought cheaper brands, he said.

But, now that the sales tax is gone, much of that business is returning, and people are starting to purchase more expensive liquor, Bender said.

“It definitely helps, because people are price-conscious in this environment,” Bender said.

He said three-quarters of his business comes from Rhode Island.

“We’ve always depended on the Rhode Island people,” he said.

Other stores reported a 5-10 percent increase in business. The important bit here is at the end: three-quarters of this store’s business comes from Rhode Island. It’s an important reminder that even as sin taxes hurt business by discouraging local consumers, they export economic activity (and tax revenue) across state or municipal lines.

It’s encouraging that most states (alas, not all) indicate they will deal with their budgets responsibly rather than raising taxes. Let’s not forget, as these budgets come together, that higher sin taxes means less money in the pockets of a state’s consumers and retailers, and more in the pockets of their neighbors.