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Why Sin Taxes Are So Good

Alden Wicker
Alden Wicker
Posted on Feb 1, 2013

alcohol and cigarette taxLet’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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1. Cigarettes

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.

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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.[6] 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.

RELATED: Checklist: I Want to Get Health Insurance

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  • Meggibbons

    This is so misguided. I continue to be overwhelmed by the extremely liberal posts of LearnVest. “So Good”?? Why can’t it be a balanced post on both sides of the idea? An informational piece with just slightly less bias? (SO GOOD??!? of all the titles…)

    Externality taxes are good, you are right about that. But taxing people with the intent of changing behavior is not. It’s telling people “we, the bureaucrats, know better than you.” Since MOST people are in agreement on cigarettes, booze, etc being “bad” for you, it flies under the radar. But theoretically, how will you feel when it applies to something you don’t agree with?I hate the idea of “let’s figure out a way to take more money from people to pay for our overspending habits, but do it in a way that enough people won’t be pissed at us that we can get away with it”

    • Julia

      I wouldn’t call this an “extremely liberal post.”  A little improper for it to show such blatant enthusiasm, but sin taxes are Economics and Public Policy 101.  Much more controversy is spent over how and when to use them than whether to use them.  

      My beef is over the overly simply definition that they gave to word “externality” — as if it only applies to monetary costs that accrue to the government or health insurance companies.  Indeed, externalities are any type of monetary or non-monetary cost or benefit that accrue to any external party… and those factor in in a very significant way here.  

      There’s also important nuance missed about the reason for imposing sin taxes.  The commenter above feels up-in-arms because of the idea that the government is determining what’s good and bad for an individual.  I would push back with a few points:  

      1) the government is elected to help shape the social contract that is good for the public as a whole, because we as individuals need to organize ourselves in order to make everything work together.  As we organize together and make decisions at any level — a neighborhood, a city, a state, a country — that is a form of government.  The activity of making these decisions is not misplaced — the question of what the decisions are is the one to get fired up about and to debate.

      • Julia

        2) it’s naive for any of us to think that completed unregulated capital markets create perfect “freedom” for us as individuals.  Our behavior is influenced dramatically by the cost and availability of products and services on the market.  Many factors determine the cost and availability of those items, and sin taxes are only 1 more factor in the puzzle.  Capital markets cannot exist in a vacuum.  They are necessarily affected by social and natural forces constantly… everything from what kind of training workers get or don’t get to what foreign policy is in place with a neighboring country to whether maternal mortality rates take out a major consumer group to what the latest celebrity has convinced everyone is fashionable.  And more directly than any of that, companies determine what to produce and make available.  The idea that it’s pure, ethical, helpful, or free to have all of these other forces shape what choices are available to us but not add in the government is misguided, in my opinion.  We aren’t living in a free and unobstructed world “but for the government”…  we’re living in a world full of powerful forces that affect availability and price way more strongly than any sin tax does.  Whether you like sin taxes or not, they are a tiny push in the biggest picture to influence the market back in a way that our elected, representative organization determines is helpful to most individuals for whom they are working.  They frequently don’t get it exactly how I would want it, but the concept is very legitimate.
        3) As implied by #2, taxes are not just a mechanism for changing behavior, they are an attempt to make corrections in the market to account for the “true costs” of products and services, which are not in any way accurately represented by retail price.  The externalities in terms of healthcare costs to the government (i.e. the taxpayer) is only 1 externality.  This article is a great one about environmental externalities, and while it doesn’t get into it deeply, it is easy to understand just how much physical pain and emotional anguish externalities can cause.  http://www.motherjones.com/environment/2013/01/lead-crime-link-gasoline  In this case, the effects of lead on human health.  But when you’re talking about cigarettes… asthma rates in this country are sky high.  How “free” do I feel as a citizen every time I walk down the street and a smoker triggers an asthma attack in me?  How free did I feel growing up with parents who smoked heavily?  Now that I know that 50% of the children with parents who smoke will develop major depression?  How free has that depression and asthma made me in terms of its effects on my schooling, career, and emotional and physical health?  How free am I growing up convinced my parents would die early?  The government’s decision to protect me by correcting the retail price of cigarettes to more accurately reflect the cost that they have to society is something that very seriously promotes my freedom.  Over my parents’ freedom, yes. But that’s the entire point of public policy — we have to organize in order to make decisions about whose rights outweigh whose in a given situation.  

    • Abbi

      I have to disagree with your label that this is a ‘liberal’ post- these are choices that people make voluntarily and then affect the greater society.  No one is forced to smoke cigaretttes, but everyone breathes the same air; higher taxes (hopefully) mean less smoke and healthier air.  There’s a reason that everyone agrees on this, and cigarette taxes pass: show me a recent study that proves how wonderful cigarette smoke is for humans, and I’m sure taxes would disappear.