July 26, 2011
With federal and state governments scrounging for new revenue sources, it might be time to tap into revenue sources that have been totally off limits up until now. Think "sin" taxes, and all that implies.
What if federal and state governments legalized and taxed pot and other illegal drugs? What if the federal government legalized prostitution?
Although these and other ideas face huge roadblocks, economists interviewed by The Fiscal Times say the fiscal picture is so bleak that "taboo" fundraising could become much more realistic in the near future. These five revenue sources could yield about $244 billion annually, according to some estimates-- more than half of the $4 trillion dollars over 10 years that the president's fiscal commission recommended.
“Desperation makes original ideas come out of the woodwork, and this is just the beginning,” said Marty Sullivan, a contributing editor at Tax Analysts. “Wacky ideas are going to become more mainstream as our budget pressures get tighter.”
Here are 5 sinful ways to solve the debt crisis.
1. Create a National Lottery
- Yearly federal revenue: $48.6 billion (derived from an estimate based on the New York lottery, which brought in $3.05 billion in revenue for education in 2010)
Forty-four states have lotteries – why not the federal government? States have used the revenue for education, infrastructure and senior citizen programs, raising more revenue than the state corporate income tax in 11 states in 2009, according Tax Foundation data. A similar structure could be a jackpot for the federal government, said Tax Analysts’ Sullivan. “The GOP likes it because it’s not a tax, Democrats like it because it raises revenue, and citizens like it because it’s a voluntary, legal form of gaming. Bingo.”
One complication: If the federal government created a lottery, states thus far dominating the field would fiercely object. “Unless you believe people will play an unlimited number of lotteries, there will be some substitution between the two, so that’s politically sensitive,” said Joseph Cordes, economics professor at George Washington University.
2. Legalize and Tax Pot and Other Drugs
- Yearly tax revenue: $46.7 billion ($31.2 billion federal, $15.6 billion state)
- Yearly enforcement cost savings: $40.3 billion ($15.6 billion federal, S25.7 billion state)
The argument for taxing drugs and reducing the costs of enforcement and incarceration is that the fiscal burden far outweighs the benefits. A California ballot measure to legalize personal marijuana use floundered in the 2010 election but ignited nationwide buzz about the possible budgetary relief of decriminalizing some drugs.
Harvard economist Jeffrey Miron calculates that state and federal governments could generate $46.7 billion a year alone by legalizing and taxing cocaine, heroin and marijuana. About 1.8 million people are arrested for drug-related crimes annually, accounting for nearly 13 percent of all arrests, at a cost of $40.3 billion
“We generate lots of corruption and violence, and by extension law-enforcement costs, because underground markets don’t lobby their congressmen in standard ways, and instead resolve issues with violence,” Miron said. “The revenue affects would sort of act as the fiscal icing on the cake of ending prohibition.”
Lawmakers and the public would need much more scientific research before ever embracing the concept, said Howard Gleckman of the Urban Institute. And the proposals would generate moral and ethical uproars. “We still put people in jail for victimless crimes associated with drugs, so if we can’t get over that, we certainly aren’t going to talk about putting a tax on drugs,” said Kurt Zorn, professor of environmental affairs at Indiana University.
“I can’t see smart people letting $40
billion sit on the [gaming] table while whacking
the living daylights out of the education system.”
3. Legalize, Regulate and Tax Non-Sports Internet Gambling
- Yearly Federal Revenue: $4.2 billion (or $42 billion over 10 years)
- Yearly State Revenue: $3 billion
Americans bet more than $100 billion annually with offshore Internet gambling firms after a 2006 law banned online poker, sports wagering and casino games. According to the Joint Committee on Taxation, that business yields about $7 billion in revenues, and to legalization advocates like Congressman Jim McDermott, D-Wash., suggests an ideal revenue source. “I can’t see smart people letting $40 billion sit on the table while whacking the living daylights out of the education system,” McDermott told The Fiscal Times.
McDermott joined with Reps. John Campbell, R-Calif., and Barney Frank, D-Mass., to draft a bill creating an online gambling tax structure. It would impose a two percent federal tax on the deposits that gambling sites receive per month, would enable states to tax online gambling site operators at a 6 percent rate if they opt in, and require companies to apply withholding tax — now 28 percent — to online winnings.
4. Eliminate Tax-Exempt Treatment of Nonprofit Organizations
- Yearly federal revenue: between $30.7 billion and 95.7 billion
- Yearly state revenue: between $26.4 billion and $46.4billion
Congressional Research Center economist Jane Gravelle says that revenue producing nonprofits’ property, income, investment, and sales tax breaks add up for states and the feds, too. “Let’s say [the government] decides to get rid of this tax treatment. Charities aren’t going to disappear and neither are churches,” Gravelle said. But losing certain exemptions would impact categories of nonprofits differently. Getting rid of property tax exemptions would hit universities, hospitals, and arts centers hardest, while sales-tax exemption cuts would raise prices of goods that nonprofit sell, which might disproportionately strike nonprofits catering to the poor, such as the Salvation Army.
Nonprofits and nonprofit activities not purely ‘charitable’ might be even more vulnerable. “As far as taxing the Red Cross — that would seem impossible,” Tax Analysts’ Sullivan said. “But you can make a legitimate case that nonprofits like the National Football League and the Olympic Committee ought to pay taxes.”
5. Legalize Prostitution
- Yearly federal savings: $1.6 billion
- Yearly revenues guesstimate: $100 million
Making the world’s oldest profession legal and taxable could mean cost savings in the form of reduced arrests and increased revenues. The law enforcement system could save about $1.6 billion a year this way, according to Harvard’s Miron. But the revenue side is less predictable, since the majority of the prostitution trade is already taxed in legal or quasi-legal massage parlors and escort services, he noted. “The amount that’s left as the sort of pure black-market street trade is really small,” he said.
In 2009, Nevada Senate Taxation Chairman, Democratic Bob Coffin, estimated taxing the legal state bordellos would raise about $2 million a year. If all 50 states participated at the same level, you get to $100 million annually.