In tough economy, states get creative

updated 4:45 p.m. ET Jan. 31, 2008

ALBANY, N.Y. - It's the perfect tax: Government exacts a big payment without having to fend off lobbyists or wage a political fight. And in most cases, the taxpayer doesn't even have a say.

That's the allure of New York's proposal to tax illegal drugs, just one of the innovative — and sometimes odd — ways states are trying to raise revenue in these increasingly gloomy economic times.

Politicians love to use such methods because they don't have to raise income taxes. But critics say that's also the danger, if long-term problems never get fixed and essentials such as health care and education go wanting.

Need a few million dollars to fill a budget deficit? Lease a toll highway, like Indiana and Virginia did; or lease toll bridges as in Alabama; or cash in on future lottery profits as a half-dozen states are considering. You could slap a tax on pornography as six states already have, or tax strip joints like they do in Texas, where they call it a "pole tax."

Some states take a slice out of pumpkin sales at Halloween. And most states tax Shaquille O'Neal and Barry Bonds when they visit, using a "jock tax" on professional athletic events.

Amused? That will cost you, too. Many states collect an amusement tax for live performances.

"They range from the outright crazy to the absolutely insane," said Nate Bailey, of the nonpartisan Tax Foundation based in Washington. "People at the local level already feel overtaxed and politicians, in a somewhat spineless way, look for a hidden way to increase revenue without raising taxes."

In New York, Gov. Eliot Spitzer last week proposed redefining little cigars as cigarettes and "hard" lemonade and other flavored alcohol drinks as liquor instead of beer, all of which would increase tax revenue.

More than a half-dozen states have a tax on narcotics and other controlled substances. Theoretically, a drug dealer in North Carolina can go to the state revenue office and get a tax stamp for $50 per gram for cocaine over 7 grams (the first 6 grams are tax-free). A moonshiner could get a stamp for $1.28 per gallon of mash.

Then the dealer or the moonshiner can walk away — the law prohibits snitching on anyone who buys the stamps — with proof he paid his debt to the tax department.

The idea is that a peddler, even one who sells illegal substances, should pay taxes. But in reality the revenue is only collected after arrests, when dealers are slapped with a tax bill.

"The only folks we have buying those stamps are stamp collectors," said Kim Brooks, spokeswoman for the North Carolina Department of Revenue.

In New York, which faces a $4.4 billion deficit, Gov. Spitzer likes the idea.

MORE FROM U.S. BUSINESS

U.S. business Section Front

JPMorgan Chase adding 1,200 mortgage officers   Madoff associate wills fortune to charity European ruling may endanger Sun-Oracle deal   FedEx projects busier holiday peak Newsweek: A hedge fund's greatest trade ever Metropolitan Home magazine to close AIG likely to be able to repay U.S.: Moody's Apple can see Microsoft on the horizon Fed: GMAC will still need more bailout money Pfizer to close research plants, slash jobs U.S. business Section Front   Add U.S. business headlines to your news reader: