Tax Design and The Meddling Factor: Lessons From Hawaii's Liquor Tax

Tax design decisions are subject to many influences, including economic and political realities. Those who make tax policy at the state level are under constant pressure to modify taxes and tax structures at the margin. In making their decisions, policy makers must assess and weigh the often conflicting advice that results from varying outlooks and interests among, as well as within, the groups providing such input.
Using Hawaii's liquor tax as a case study, this paper illustrates how seemingly innocuous policy meddling can turn a good tax into a bad one. The events that led the Hawaii Legislature to decide to substitute a flawed gallonage levy for a successful ad valorem tax are reviewed. The relative merits of ad valorem and per-unit liquor taxes are discussed. Implications of adoption of the gallonage tax are presented. Finally, the article discusses the reasons why meddling may be attractive to both taxpayers and those who levy the tax, and it concludes that tax design criteria should include disincentives to meddle as a reasonable principle of taxation.