How Sin Taxes Work

As indicated earlier, sin taxes are taxes on stuff we like but that society thinks we probably shouldn't have, at least not in large quantities. And they've been around for a long time, too. In fact, between 1863 and 1913, 90 percent of the U.S. government's revenue came from taxes on sinful substances like smokes, wine, beer and liquor [source: IRS]. In case you're wondering what happened in 1913, that was the year income tax became a thing. A sin tax is not an official category; it's a popular name for an excise tax levied on products thought to be costly to society.

It's interesting that the American government's reliance on sin taxes started in 1863 because almost exactly a century earlier in 1764 the British Empire's imposition of a sugar tax on the American colonies was one of the sparks that lit the revolutionary flame.

The main purpose of the sugar tax was to generate revenue for the king's coffers, but it was also an attempt to kill two birds with one stone. The American colonists weren't just using sugar to sweeten their porridge; they were using it to make rum. Lots of rum. In fact, the colonies had a reputation for excessive rum intake, and upon this practice the crown frowned [source: Newkirk]. Needless to say, the new tax was unpopular and when, a decade or so later, the Brits threw a stamp tax on top of it, things got ugly.

Even Bloomberg's experience with banning versus taxing played out long ago at the very founding of the United States. As the Founding Fathers met in Philly to hash out the Constitution, a gentleman from Virginia named George Mason argued that Congress should be able to enact something called "sumptuary laws."

Sumptuary laws have been the tools of European and Asian lawmakers since ancient times. Usually, they took the form of preventing commoners from buying bling and throwing ridiculous parties. On the one hand, such laws helped prevent the masses from squandering their hard-earned money on useless trinkets. On the other, sumptuary laws effectively served to maintain class distinctions (and make sure you had money available for tithing). The idea was that it was important to be able to tell a rich and powerful person from an impoverished peon. If poor people could dress in fancy garb, everybody would be confused, and who knew what shenanigans would ensue? (Remember "The Prince and the Pauper"?) Queen Elizabeth I, for instance, was a big fan of sumptuary laws as she found it intolerably baffling when common people got gussied up like aristocrats [source: Crossen].

To be fair, back at the Constitutional Convention, George Mason didn't say he wanted sumptuary laws for the maintenance of class distinctions, but rather to improve the general conduct of Americans. In other words, he didn't want the citizens of the new republic to be too flashy. But his fellow delegates didn't agree. Taxes, they said, were better than laws [source: Crossen].

That could be true, but it's setting the bar low. Do sin taxes really work?

When lawmakers impose sin taxes these days, the official goals are to improve health outcomes, reduce the negative impacts of the taxed substance and raise a little revenue while they're at it. There seems to be some evidence that the second and third goals can be achieved, but as to the first, the jury is still out.

Although Berkeley was the first jurisdiction in the U.S. to implement a soda tax, it's not the first place in the world to do it. It's not even the first in North America. As of 2014, the entire country of Mexico has a peso-per-liter tax on soft drinks and a tax of 8 percent on junk food. Consumption of both categories of food and drink have fallen dramatically [source: Newkirk]. But we don't yet know whether the national rate of obesity has changed, or whether people are any healthier as a result of the tax. The problem here is that eating sugar and junk food isn't the only way to become obese and/or unhealthy. In other words, success could depend on which sin you tax.

Take cigarettes. Not only does taxing them cut consumption, but if the tax is high enough, health outcomes even improve a bit. A sin tax on cigarettes can lower incidences of lung cancer, heart attacks and strokes. Not by a lot, but enough to make it worthwhile. Presumably, some of the negative effects of secondhand smoke would also be diminished at the same time.

Taxing alcohol would seem to be even more effective. Back in 2009 the state of Illinois made each bottle of beer more expensive by 1 cent and each serving of hard liquor by 5 cents. Amazingly, a study found that for each month after the implementation of the new taxes, deaths associated with drunk-driving dropped by 25 percent in the general population and 37 percent for young people [source: Newkirk]. Researchers expected to find that hardcore drinkers wouldn't be affected by the tax, figuring their compulsion to imbibe would be impervious to small price increases. But to everybody's surprise, drunk-driving deaths went down even for this category of drinker [source: Newkirk].

Sounds like great news, but skeptics, like mathematics professor Rebecca Goldin, have taken a second look at the data and raised serious concerns about the conclusions stated above. In her view, correlation does not equal causation. She argues the decline in traffic deaths is not specific to alcohol-related crashes, but is part of a general trend unrelated to drinking [source: Goldin].

So maybe some sin taxes can work if they tax the right sin, but maybe they don't. Taxing cigarettes and alcohol is popular in part because smoking and drinking are perceived to be not only unhealthy for the individual consuming them, but also for the public at large (e.g., secondhand smoke, drunk-driving accidents, domestic abuse, etc.).

It isn't quite as clear how people who choose to drink soda and eat unhealthy food are harming anyone other than themselves. It's been argued that society bears the cost of the medical consequences of an unhealthy diet, but that could be said of many lifestyle choices, including sloth. It's well known that lack of exercise is bad for our health. Should we be taxed for laziness?

We've established that sin taxes can and do work under the right circumstances, but should they be a tool in the government's taxation toolbox? One argument against the use of sin taxes is that they're a regressive tax, one that affects the poor more than the rich.

On the one hand, this argument seems to be a no-brainer, since a sin tax is a form of sales tax, and sales taxes almost always hit poor people harder than wealthy people. That is, unless the tax is specifically aimed at the stuff rich people like to buy, like yachts or luxury cars. Such taxes exist, but they're usually called luxury taxes. Whereas sin taxes cover the things the IRS deems dangerous, luxury taxes are levied on high-price items deemed nonessential.

Are sin taxes regressive? Maybe. Take, for example, taxes on cigarettes. As of 2016, a New Yorker has to pay a total of $5.85 in state and municipal taxes on each pack of cigarettes. Then add $1.01 in federal excise tax, bringing it $6.86. If said New Yorker smokes a pack a day, that amounts to more than $2,500 a year in cigarette taxes alone [source: New York State]. Proportionally, that's much more of a hit for a low-income person than for somebody with plenty of dough.

Of course, the purpose of the tax is to force people to cut back on their habit, or quit altogether. Everybody knows that smoking is one of the worst things you can do for your health, so if you don't like paying heaps of tax, smoke less. It's that simple. At least that's the argument of sin tax proponents. And in this case, they have a point. As we saw earlier, raising taxes on cigarettes does seem to reduce the amount people smoke, and this is particularly true for poor people. This is good news in that the poor typically smoke more than the rich [source: Remler].

Taken together, these factors are the grounds for some arguments that taxes on cigarettes are actually progressive rather than regressive. The idea is that they have progressive effects on the health of poor people because of, not despite, the fact that they cause more financial hardship for those with low incomes.

But even if you find this argument compelling, there are still reasons for skeptics to reject the idea of sin taxes.

Sticking with the cigarette tax example, skeptics argue that while cig sin taxes might be able to reduce smoking to a point, there seems to be a limit. If you keep upping the ante, the reductions often start levelling off. The reason for this is that some people just won't, or can't, quit, and since these same people are often poor, they can't afford to continue to buy cigarettes — legally.

In the early 1990s, the Canadian government sharply increased the tax rate on cigarettes. The hike was too steep, and it spawned a giant black market in contraband cigarettes. While black market sales of cigarettes accounted for only 1 percent of sales in 1987, they high-jumped to 31 percent in 1993. That's a result nobody wants. Not only does it mean the tax isn't having its desired effect on public health, it also means lost revenues. In 1994 Canada abruptly cut its sin taxes on cigarettes, a measure that helped reduce contraband sales and bring legal sales (and revenues) back up [source: Kelly-Gagnon].

This question of revenues is a big one. If you decide to raise a tax on a "sinful" product, you have to have a plan for what to do with the money that comes in. Often, the revenue is allocated for spending on health care. In some ways, this seems like an elegant, win-win solution. But sometimes it backfires.

In February 2009, Arkansas nearly doubled its tax on cigarettes to $1.15. The state had lots of great health-related plans for the projected $86 million in revenue this measure would bring in. But to the astonishment of legislators, rather than having more money, they ended up with $10 million less than they'd collected the previous year. The reason? Increased black market sales plus the more expedient (and legal) solution of simply crossing state lines to buy cheaper cigarettes [source: Moser].

And this brings us to yet another objection to sin taxes. Remember how the U.S. government was largely dependent on sin taxes for revenue up until 1913? That's no longer the case, but some sin-tax skeptics estimate that taken together, both state and federal governments collect $96 billion annually from our bad behavior [source: Otero]. This, they argue, puts government in a moral bind. On the one hand, they impose the taxes to encourage people to sin less, while on the other, the government then comes to depend on the income from all that sinful spending. In other words, lawmakers have to hope that people will behave better, but not too much.