A sin tax is an excise tax on socially harmful goods. An excise tax is a flat tax imposed on each item sold. The most commonly taxed goods are alcohol, cigarettes, gambling, and pornography. Excise taxes are collected from the producer or wholesaler. They drive up the retail price for consumers.
- A sin tax discourages activities that create socially harmful consequences
- It raises the activity's cost so that fewer people do it
- The revenue helps states pay for the costs resulting from the additional harm to the public good
- Some sin taxes are regressive because the poor pay a higher percentage of their income
Federal Sin Taxes
There is a federal excise tax on cigarettes, alcohol, and gambling winnings. There are also federal excise taxes on gasoline, airline tickets, and some health-related goods.
In 2017, federal excise taxes generated $83.8 billion or 2.5% of federal tax revenues. Of that, $13.8 billion were cigarette taxes. The tax adds $1 to each pack of cigarettes.
Alcohol taxes contributed $9.9 billion in federal revenue. Liquor is $13.50 per proof
gallon. Each proof gallon is a liquid gallon that is 50% alcohol. Wine is $3.40
per gallon. Beer is $18 per barrel, although micro-breweries pay $7 per
State Sin Taxes
States can also charge sin taxes. In 2014, states collected $32.5 billion in sin
taxes. They collected $16.9 billion in cigarette taxes. They received $6.1
billion for liquor, wine, and beer sales. They received $9.5 billion in taxes
on gambling, not including state lottery revenues.
On average, sin taxes contributed just 3.8% of total state revenue. Some states rely on sin taxes much more than that.
Rhode Island depends on sin taxes for 15.9% of its revenue. That's because it has two gambling casinos. It beat the gambling capital of the world, Las Vegas. Nevada collects $900 million in taxes from casinos, but sin taxes only contribute 14.8% of revenue. This state income allows Nevada to waive
income taxes on its residents.
The national average sin tax for cigarettes is $1.58 per pack, according to research done by the Arizona Daily Sun. But that ranges from $0.60 a pack to $3 a pack. The lowest rates are in the tobacco-growing states of Georgia, Kentucky, North Carolina, and Virginia. They also have the highest smoking rates. Kentucky is No. 1, with 25.9% of the population who smoke. West Virginia is second, at 25.7%. Georgia has 17.7%, North Carolina has 19.0%, and Virginia has 16.5%.
The national average tax for liquor is $4.56 per gallon. It's $0.85 for every
gallon of wine and $0.29 for each gallon of beer.
Alaska charges $12.80 for every gallon of liquor and $2 for each pack of cigarettes. Hawaii is second, charging $5.98 for each gallon of liquor and $3.20 for each pack of cigarettes.
Wyoming and Missouri have the lowest sin tax rates. Wyoming has no liquor tax and only charges $0.60 for each pack of cigarettes. Missouri imposes $2 on each gallon of liquor and $0.17 on each pack of smokes.
Although there might be good reasons to impose sin taxes on society, some of these taxes have their downsides as well. Here are the pros and cons of imposing sin taxes.
The taxes discourage unhealthy behavior.
They pay for some of society's costs.
They are popular with voters.
The taxes aren't high enough to eliminate the behavior.
They don't completely pay for the costs to society.
They are subjective, as other harmful substances are not taxed.
There are three arguments in favor of sin taxes. They discourage unhealthy behavior, they pay for society's costs, and they’re popular with voters.
Sin taxes discourage people from unhealthy behavior. In 2009, the federal government raised cigarette taxes by $0.62 a pack. Teenage smoking rates fell by 10%, and overall cigarette sales dropped 8.3%. Between 2005 and 2015, the percentage of people who smoked fell from 21% to 15%.
For example, a 10% tax on cigarettes reduces demand by 4%. This reduction in demand is even more pronounced among young people. A 10% tax reduces smoking among those aged 12 to 17 by 11.9%.
Why do states want to reduce smoking? Lung cancer is the leading cause of cancer death.
Between 80% and 90% of lung cancer deaths are due to smoking. Kentucky, the state with the highest tobacco use, has one of the highest rates of lung cancer.
Sin taxes help states pay the cost of treating the public health consequences of smoking, drinking, and gambling. But states don’t spend as much of this tax revenue on health care as they could. It covers some of society's cost of educating people about lung cancer.
Sin taxes are more politically viable than raising income or sales taxes. According to the Campaign for Tobacco-Free Kids, national and state opinion polls have "consistently shown broad voter support" for tobacco tax increases.
Sin taxes aren't high enough to work. If states really wanted to eliminate the behavior, they would raise the tax until it was high enough to discourage most people from picking up the habit, but not high enough to encourage a black market.
Sin taxes aren't high enough to offset the behavior's cost to society. If they were, they'd be a Pigouvian tax.
An example of this type of tax is the carbon tax. Britain imposed a carbon tax, prohibitive enough to force utility companies to switch from fossil fuels to natural gas. As a result, greenhouse gas emissions in the United Kingdom drastically fell to late 19th century levels. If the carbon tax were just a sin tax, its cost wouldn’t be high enough to compel companies to look for cleaner alternative fuel sources.
Sin taxes are subjective. Lawmakers decide that some health issues, such as cigarette and alcohol addiction, should be taxed and others shouldn't. Other so-called sins, such as opium and heroin addiction, aren't taxed but are simply declared illegal. Other addictions, such as sugar, aren't taxed even though they cause health problems such as diabetes.
In 1776, Adam Smith wrote that taxes on cigarettes, rum, and sugar are appropriate. These commodities are not essential for life but are widely consumed. The federal government began taxing tobacco during the Civil War.
In the 1920s, cigarette taxes became widespread as advertising doubled the number of smokers. In 1951, the federal tax was raised to $0.08 per pack to help finance the Korean War. In 1983, it doubled to $0.16 a pack. By 2019, it had reached $1.0066.