The “Sin Tax” in State and Local Governments

Should commodities, such as cigarettes or alcohol, be taxed higher than other goods or services? Such “sin taxes,” as they are often called, are frequently proposed in state governments as a way to increase revenue while, simultaneously, discouraging the vice. This essay will examine the economic, political and ethical aspects of the so-called “sin tax” and summarize, in conclusion, some of the most recent legal developments regarding the issue. 

Economic Considerations

A “sin tax” is really nothing more than an excise tax, or, or a tax levied only on select commodities.  An excise tax is typically levied, within the realm of economics, with the inevitable result of reducing the supply of a commodity. Because demand cannot be artificially controlled, by artificially raising the price of the commodity through a tax, the supply of the item is effectively reduced (Sandowsy, 1994). Dealing with vices one might think this desirable even if the economic impact is minimal. 

According to Maciag (2015) the states which rely most heavily upon sin taxes are Rhode Island, closely followed by Nevada. In each case, gambling is the most significant contributor accounting for 15.9 and 14.8 percent of each state’s revenues respectively. Nationwide, however, gambling taxes rank third having garnished a total of 5.5 billion dollars in state taxes in 2014, compared to alcohol at 6.1 billion and tobacco at almost 17 billion (US Census Bureau 2014, qtd. in Maciag 2015). 

As staggering as the above numbers appear, further analysis suggests that they may be deceiving. There is a significant disparity in these taxes between locales- something consumers may be unaware of due to political socialization. Excise taxes on tobacco, for example, range from 17 cents in Missouri to $4.35 in New York (Wright & Zeiler, 2014, p. 209). Many consumers avoid excise taxes by simply purchasing their goods across state lines or via the internet (Wright & Zeiler, 2014, p. 209). In Illinois, which has some of the highest “sin taxes” nationwide, a five percent tax hike on packaged alcohol in 2013 not only failed to show any significant increase in revenue for the state, but neighboring Missouri actually showed a significant increase in sales as a result (Griffin, 2013). The result is not only a loss of the anticipated gains from the tax increase but a loss of the sales tax that would have been accumulated had the steeper tax never been enacted. For an excise tax to be effective the tax must be able to effectively control costs in order to have the desired impact on reduced supply. 

Political Considerations

The political approach to the “sin tax” ultimately depends upon how one views the role of government and its role in the private lives of citizens. As has been pointed out, “the justification advanced for taxing sin goods is often based on paternalistic, normative grounds—policy makers can make better consumption choices for individuals than individuals can make for themselves” (Hoffer, Shughart & Thomas, 2013, p. 3).  Republicans who advocate for “less government” tend to oppose “sin taxes” while Democrats and other progressives often favor them. That said, the lines in the sand are not so cleanly drawn. Several authors have pointed out that “sin taxes” are regressive, typically hitting the poor harder than any other class (Snowden, 2012, pg. 3). This turns off many progressives and their favorability towards politics. On the other side of the spectrum, Republican Kansas Governor Sam Brownback recently turned to “sin taxes” in an effort to balance his state’s budget (McArdle, 2015).  

While politicians advocating for a “sin tax” may face little opposition from their constituents initially, the deep-pockets who often lobby their state and local congressmen, and spend millions to impact popular opinion, are more vocal. In 2012 a dollar-per-pack cigarette tax proposed with the altruistic goal of funding cancer research was blasted by a $47 million advertising campaign funded primarily by tobacco companies (Nagourney, 2012). The measure ultimately failed to pass (Willon, 2012). 

Recent Legal Developments

According to Mcardle (2015) what makes the “sin tax” attractive to many states is that excise taxes are relatively easy to administer and have very few regulations coming from the courts. The most recent push for “sin taxes” has come in the form of taxes on sugary beverages. Following the success of the a law’s passage in Berkeley, 2014, New York City mayor Michael Bloomberg is attempting a similar tax in 2016—an effort that could be duplicated by as many as a dozen additional cities (Walczak, 2015).  Even if successful in reducing consumption, however, the opposite side of the coin is a smaller tax base and reduced revenue. As has been shown above, the “sin tax” has questionable long-term economic benefits. Only time will tell if this latest “push” for taxing soda and sugary drinks will prove beneficial.

References

Bartlett, B. (2010). Taxing sin: a win-win for everyone? Tax Analysts. Retrieved from: http://www.taxanalysts.com/www/features.nsf/Articles/4656FF5DE09AE5D1852577A600703965?OpenDocument

Dorsey, R. (2010). In defense of “sin taxes”: tax policy, virtue ethics, and behavior economics. Southern Law Journal. 20. 53-68. 

Griffin, J. (2013). ‘Sin’ tax hikes don’t yield long-term revenue spikes. Daily Herald. Retrieved from: http://www.dailyherald.com/article/20131023/news/710239934

Hoffer, A. J., Shughart W. F., and Thomas M. D. (2013) Sin taxes: size, growth and creation of the sindustry. Mercatus Center: George Mason University. Retrieved from: http://mercatus.org/sites/default/files/Shughart_SinTaxes_v2_1.pdf

Maciag M. (2015). The states most dependent on sin taxes. Governing: the states and localities. Retrieved from: http://www.governing.com/topics/finance/gov-sin-tax-states-dependency.html

McArdle, Megan (2015). Why states like sin taxes. BloombergView. Retrieved from: http://www.bloombergview.com/articles/2015-01-23/what-states-get-out-of-sin-taxes

Nagourney, A. (2012). A $1 cigarette tax starts a $47 mission brawl in California. The New York Times. Retrieved from: http://nyti.ms/LWICSV

Sadowsky, J. (1994). The economics of sin taxes. The Acton Institute: Religion & Liberty. 4.2. Retrieved from: http://www.acton.org/pub/religion-liberty/volume-4-number-2/economics-sin-taxes

Snowden, C. (2012). The wages of sin taxes. London: The Adam Smith Institute.  

Walczak J. (2015). The opening salvo of 2016’s soda tax battle. Tax Foundation. Retrieved from: http://taxfoundation.org/blog/opening-salvo-2016s-soda-tax-battle

Willon, P. (2012). Supporters admit defeat on prop. 29 tabacco tax. Los Angeles Times. Retrieved from: http://articles.latimes.com/2012/jun/23/local/la-me-prop-29-20120623

Wright R. E. & Zeiler T. W. (2014). Guide to U.S. Economic Policy.  Thousand Oaks, CA: CQ Press.