Let’s say you’re the government, and there’s an unhealthy, dangerous, costly and environmentally damaging behavior you want to discourage. Plus, you could use some revenue.
A handy solution: sin taxes. They’re those benevolent or heavy-handed (depending on who you ask) revenue generators that want to change the world for the better.
Call them misguided or enlightened, but sin taxes are here to stay–because they are so darn effective. In fact, you probably already pay at least one.
What Merits Taxing?
Three things are likely to get a sin tax passed:
1. An obvious externality. This is the side effect of a behavior from health care costs imposed on governments and insurance companies by things like obesity, smoking and deaths from drunk driving accidents.
2. Demonstrable benefit. If possible, legislators and voters like to see that a tax decreases the undesirable behavior before implementing it.
3. Revenue for a good cause. To convince citizens that a brand-new tax merits taking their money, tell them how you’ll spend it.
Here are some notable examples of taxes that have passed with flying colors, as well as taxes that have utterly failed.
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Smoking costs the U.S. nearly $200 billion in health care costs and lost productivity each year. All 50 states have a cigarette tax, ranging from $0.17 per pack in Missouri to $4.35 in New York. Stacked on top of this are separate taxes from the federal government, as well as many cities (New York City has a $5.85 total tax) and even some counties.
It’s also the most studied tax, providing us a glimpse into the benefits and unintended consequences of sin taxes. In 2009, the federal cigarette tax rose from $0.39 to $1.01 per pack, lifting cigarette prices by 22% overnight. The tax reduced the number of smokers by about 3 million from 2009 to 2012, according to surveys from the Centers for Disease Control and Prevention.
Unfortunately, the cigarette tax is regressive–it hits low-income people the hardest. Families earning less than $50,000 a year make up half the U.S. population, and two-thirds of smokers. In New York state, low-income smokers (earning under $30,000 a year) spend an astonishing 25% on average of their income on cigarettes. That’s more than we recommend you spend on all Lifestyle Choices combined!
An easy fix to New York’s (and most other states’) low-income problem would be to use the tax revenue to provide free resources to help smokers quit. But like many states, New York funnels most of the tax revenue into the broader state budget. According to a report by the American Lung Association, 42 states, plus D.C., failed to invest even 50% of what is recommended by the CDC in proven prevention programs.