Federal 
Taxing Illegal Markets to Raise Revenue:
To plug a budget deficit, NYS Governor Spitzer proposes to tax illegal drugs
18 Feb 2008 in Regulatory Economics
New York State Governor Eliot Spitzer has proposed to plug part of an expected $4.4 billion budget deficit by enacting a tax on illegal drugs. Similar laws have been enacted elsewhere to enable law enforcement to charge drugs distributors and dealers with another form of tax evasion. (Chances are they already evade federal and state income taxes.)
Are there any conditions in which this proposal could raise significant revenue?
Washington Post staff writer Keith Richburg reports that Spitzer's proposal has attracted a great deal of ridicule. Richburg adds:
Taxing illegal drugs is more widespread than is generally known. At least 21 states have some form of tax for illicit drugs, although some of those laws have been challenged in courts, and others have fallen into disuse. Almost all the remaining drug-tax laws are used mainly by local law enforcement agencies as a way to seize drug money and fund counter-narcotics operations.
It's not clear that in these states, specific taxes on illegal drugs are necessary for authorities to seize drug money and assets. Federal and state drugs laws already include broad asset forfeiture provisions.
Apparently, no state actually generates revenue from these taxes. So why would Spitzer make this proposal?
The specifics of the tax are not clear. The briefing book for the governor's proposed 2008-09 budget (PDF, p. 118) contains only the following bullet, in a section listing legislative changes that would be required to implement it:
- "Require a tax stamp on illegal drugs."
Richburg's article suggests that opponents worry that such a law would "clog the courts and harm minority groups." But the stated purpose of this law is not to enable more prosecutions or add prison time; it's to generate revenue for the State.
For a tax on illegal drugs tax to generate incremental revenue, its targets probably have to be persons who (a) have enough assets such that a conviction could lead to a significant financial sanction that they could afford to pay; and (b) were not involved in illegal drug distribution or retailing where existing forfeiture laws are adequate, or would be hard to prosecute under those laws. Condition (a) rules out minority groups if it is presumed that they have little income. Condition (b) rules out drug dealers and distributors, because their assets are already subject to seizure if they are arrested (conviction is not always necessary).
Athletes and other entertainers seem to often be in the news over drug use allegations. Rarely, if ever, are they involved in dealing or distribution, and there are significant pressures on law enforcement agencies not to prosecute them as if they were.
Spitzer's proposal creates an opportunity for New York State to seize significant financial assets from these people if they are ever arrested for a drug law violation. Of course, they could avoid this fate simply by purchasing enough drug tax stamps to cover whatever amount they might be caught possessing.
If Spitzer's actually intends to snag professional athletes as well as other entertainers, and the proposal survives ridicule long enough to be crafted into a bill, then we should see language written broadly enough to encompass anabolic steroids, human growth hormones, and other so-called "performance-enhancing drugs."
