Sin Taxes, Their Pros and Cons, and Whether They Work
Why the Government Taxes Sin
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.
Federal Sin Taxes
In 2015, federal excise taxes generated $98.3 billion, or 3 percent of federal tax revenues. Of that, $14.5 billion were cigarette taxes. The tax adds $1 to each pack of cigarettes.
Alcohol taxes contributed $9.6 billion in federal revenue. Liquor is $13.50 per proof gallon. Each proof gallon is a liquid gallon that is 50 percent alcohol. Wine is $3.40 per gallon. Beer is $18 per barrel, although micro-breweries pay $7 per barrel.
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.
Sin taxes contributed just 3.8 percent of total state revenue. Some states rely on sin taxes much more than that. Rhode Island depends on sin taxes for 15.9 percent 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 percent of revenue. This state income allows Nevada to waive income taxes on its residents.
The national average sin tax is $1.58 per pack of cigarettes. But that ranges from $.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 percent of the population who smoke. West Virginia is second, at 25.7 percent. Georgia has 17.7 percent, North Carolina has 19.0 percent, and Virginia has 16.5 percent.
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.
The two states with the highest cost of living also have the highest sin tax rate. 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.
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 percent, and overall cigarette sales dropped 8.3 percent. Between 2005 and 2015, the percentage of people who smoked fell from 21 percent to 15 percent.
Why do states want to reduce smoking? Lung cancer is the leading cause of cancer death. Between 80 and 90 percent of lung cancer deaths are due to smoking, according to the National Cancer Institute. 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. The cigarette tax is also a Pigouvian tax. It covers society's cost of educating people about lung cancer, and has its pros and cons.
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. In 2017, 57 percent of Americans supported sin taxes on soda if the money was used for children's health programs.
There are three major arguments against the use of sin taxes. They are regressive, they don't work, and they aren't a sustainable funding source.
Sin taxes are regressive because they impose a harsher burden on the poor than the rich. In poor families, a larger proportion of income pays for shelter, food, and transportation. Any tax decreases their ability to afford these basics. The wealthy, on the other hand, can afford the basics. Taxes decrease their ability to invest in stocks, add to retirement savings, or purchase luxury items. Sin taxes are regressive because they take a greater percentage of a poor person's income.
Cigarette taxes are the most regressive excise tax. Poor people are more likely to smoke. A 2015 Gallup Poll found that about 30 percent of those earning $24,000 or less smoked. Only 13 percent of those making more than $90,000 did. The lowest-earning fifth allocated 1.3 percent of their spending for cigarettes, compared to 0.3 percent for the highest-earning fifth.
A complicated factor is that low-income people are more responsive to higher sin taxes. The poorest half of smokers reduce their cigarette consumption four times more than the richest half when taxes increase the price. As a result, people below the poverty line paid 11.9 percent of the tax increase. But they received 46.3 percent of the benefit as measured by fewer deaths.
Alcohol taxes aren't as regressive. A 2015 Gallup Poll found that 27 percent of those earning less than $30,000 reported they drink more than they should. It's not much more than the 24 percent of those earning $75,000 or more who reported the same. Only 18 percent of those in the low-income group said they had a drink within the last 24 hours, compared to 47 percent in the high-income group. The Consumer Expenditures Report found that the lowest-earning group spent 0.8 percent of their income on alcohol.
The highest-earning group spent 1.1 percent.
Sin taxes don't work on everyone. Some people will still smoke, drink, and gamble. That's because these behaviors are addictive. A small percentage of people make up most of the usage. Five to 10 percent of the population has a mental illness. But they smoke 40 percent of all cigarettes. Their addictions cause them to lose their health, jobs, and homes. A few taxes aren't a deterrent. The National Bureau of Economic Research found that taxes must double the price of a pack of cigarettes to decrease adult smoking by even 5 percent.
Some people just switch to more damaging substances when sin taxes become too high. Studies found that teens switch to marijuana when states raise beer taxes. Smokers in high-tax states choose cigarettes with higher tar and nicotine to get more "bang for their buck."
Sin taxes aren't a reliable source of long-term income for states. People are smoking less. Americans consumed 299 billion cigarettes in 2010, down from 456 billion in 2000.
How States Use the Revenue
In 2011, states spent $658 million on tobacco control and prevention. That's less than 3 percent of the states' revenues from cigarette taxes. It's only 17.8 percent of the level recommended by the Centers for Disease Control.
In 2005, total government spending on substance abuse and addiction was $468 billion. Of that, $207 billion went toward health care. They spent $47 billion on criminal justice costs. Just $8.9 billion went to prevention and treatment. For every dollar spent on prevention and treatment, the government spent almost $60 on the consequences.
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 $0.08 per pack. In 1983, it doubled to $0.16 a pack, then $0.39 a pack in 2002.