July 7, 2005

There Are None So Blind...

The state of Tennessee is claiming that its new tax on illegal drugs is generating more revenue for the state than it is costing to enforce, and media has bought the story. But an analysis released last week by the Tennessee Center for Policy Research finds the tax has actually cost far more to administer than it has generated in revenue - and the "Uncontrolled Substances Tax" or UST has serious constitutional problems.

The TCPR's report notes that the tax generates revenue two ways - the sale of tax stamps to people who possess illegal drugs, and the assessment of taxes on people caught with illegal drugs. So far, the state has sold very few of the tax stamps, but claims the tax has generaated $606,687 in revenue and the state has assessed more than $15 million. Further, the state claims its 10-person department has spent just $376,400 since the program began in January.

That last figure is a bit of creative spin as it ignores the $1.2 million the legislature allocated for one-time start-up costs for the program.

And the state's reported total for revenue collected fails to mention that the state only keeps 25 percent of that money, with the rest going to the local government.

The TCPR's analysis, released June 27, and based on January-May revenue data from the state, found that:

As of June 21, 2005, the Department of Revenue had assessed $14.9 million in tax penalties for drugs on which taxes were not paid. However, according to Reagan Farr, Deputy Commissioner of the Tennessee Department of Revenue, the state collected only $480,007 of that amount through property seized and fines levied as a result of drug busts. Three quarters of the funds collected—$360,005—has been or will be returned to the local law enforcement agencies involved in the arrests, leaving only $120,002 in new revenue for the state resulting from enforcing the UST. In total, as of June 21, the total state revenue generated by the UST both in terms of sales of the stamps and fines levied on those found eluding the UST is $120,296. The cost of implementing the tax and operating the bureaucracy necessary to administer the tax over the same period reached $1.58 million. The cost of the salary and benefits of the individuals employed to oversee the administration of the UST stands at $545,000 per year. From January 1, 2005-June 21, 2005, the UST cost taxpayers $1,456,556 more than it brought in. Even removing the pricey initial expenses associated with setting up the agency, the UST is on pace to cost Tennesseans $544,720 more than it brings in every year.

The constitutional problems with the tax vis a vis the Fifth Amendment, spelled out in the TCPR report, are more troubling to me than the fact that, so far, the tax is a money-loser for the state. The constitutional problems include a violation of the Fifth Amendment protections against "double jeopardy," and self-incrimination, and the TCPR report notes that courts have struck down similar taxes in Arizona, Texas and Wisconsin based on those issues.

The TCPR released its report to the media more than a week ago. It got no mention in The Tennessean's story today, which merely regurgitated the claims made yesterday by the state's Department of Revenue in a press release. The Tennessean editorialized in favor of the tax on illegal drugs on April 14, 2004, and again on Jan. 1, 2005.

Incidentally, this is not the first time that Nashville's largest daily newspaper has deliberately ignored policy research published by the TCPR.