Cash-strapped states resort to unusual taxing practices

Taxing narcotics and having a “pole tax” for strip clubs are two of the stranger taxes.

.ALBANY, N.Y. (AP) – 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 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.

In his budget proposal to the Legislature last week, he promised $17 million in revenue from it. He also wants to require Internet giants such as Amazon.com to collect tax on an estimated $47 million in sales to New Yorkers, who are currently on an honor system to report on their tax returns how much they spend online.

Three recent reports predicted states will feel the pinch of the economic downturn. Nearly half are projecting a budget shortfall within the next two years.

A few states such as Maryland still raise money the old-fashioned way – by increasing broad-based taxes. Maryland raised taxes by $1.4 billion in November, but it is also considering legalizing slot machines to pay for health care.

New York’s fiscal year starts April 1, and typically deals with such problems ahead of most states, where the budget goes into effect on July 1.

New York also has a tradition of some of the most outlandish schemes. In 1991, the Legislature famously approved the “sale” of Attica prison to a state authority for $242 million that was then used to help balance the budget. The state was left with a total mortgage of more than $450 million including some of the original debt on a prison it had already paid to build.