Sin Taxes, Zoning Laws And Occupational Licensing Are Holding Back The Poor

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Guy Bentley Research Associate, Reason Foundation
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Abolishing occupational licensing, relaxing zoning laws and slashing taxes on alcohol and tobacco are key policies to helping the poor, according to a new paper by the Mercatus Center.

Economist Steve Horwitz argues that state and local governments have the ability to improve the lives of the poor through deregulation and resisting the temptation to tax certain products.

Central to the paper is the claim that upward mobility is being stymied because poorer Americans have to wade through a plethora of complex and expensive rules to make a living. Two of the major obstacles Horwitz identifies are occupational licenses and zoning laws.

Occupational licenses can cost hundreds of dollars and require a significant investment in education. Defenders of these licenses argue they are essential to public safety. However, Horwitz claims they are unnecessary because many of these jobs such as manicurists and florists represent no significant risk to the consumer.

Instead of licensing, Horwitz observes that “consumers can use services such as Yelp to research products or providers online before making a purchase.” Instead of protecting consumers, occupational licensing erects barriers to entry and protects established interests from competition.

To illustrate this problem, Horwitz points to ride-sharing service Uber that provides “employment opportunities for those in need as well as cheaper transportation for those of modest means.”

Uber drivers are not technically employees but independent contractors and are, therefore, exempt from much employment red tape. “Unsurprisingly, traditional taxi companies are protesting the service, claiming it is illegal and dangerous because it is not subject to the same regulations as taxis,” says Horwitz.

Zoning laws perform a similar function to occupational licenses in that they protect established industries from less well-funded challengers. Street vendors and food carts are often targets of these kinds of regulations.

The Mercatus report points to Chicago where it costs $250 for a basic business license for two years. Horwitz says these “legal restrictions, normally at the municipal level, often make such options prohibitively expensive and thereby remove an important path out of poverty.”

In Chicago, street vendors need to buy a basic business license, another license permitting them to prepare food on the street and then adhere to a host of regulations. These include “being at least 200 feet from a brick-and-mortar restaurant.”

In New York City, the total number of carts and food trucks granted licenses is capped. This has led to a thriving black market for licenses with prices ranging from $10,000 to $20,000, according to Mercatus.

On the fiscal side, local and state governments could improve the lives of the poor if they didn’t heavily tax products that are disproportionately consumed by the least well-off.

“Sin taxes — taxes that are intended to change the behavior of consumers—are one prominent category of taxes with a disproportionate effect on the poor,” writes Horwitz.

This is because poorer Americans spend a greater share of their disposable income on tobacco, alcohol, and high-fat food than richer Americans.

To demonstrate the regressive nature of sin taxes Mercatus cite a study in the UK showing the poorest 20 percent of households spend roughly $2,000 per year on sin taxes, amounting to around 11.4 percent of their disposable income.

Poor British households spend almost 40 percent of their disposable income on sin taxes and consumption taxes, compared to households in the top 20 percent who spend just 15 percent.

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