What the Heck is a Sin Tax?

Last year, Pennsylvania had a rather nasty budget impasse.  It made national news, and generally annoyed every Pennsylvanian who would rather be famous for our delightful groundhogs than the intractability of our leaders’ political fights.  One way the politicians finally were able to work out a solution that appeased everyone (or at least shut them up long enough to get the budget passed) was to increase the state tax on cigarettes.  Various commentators, from the papers to NPR, referred to the cigarette tax as a ‘sin tax’, which brings us to the obvious question: what is a sin tax?

Taxing Sin Done Right

Put simply, a sin tax is a tax on sin.  You probably guessed that, though, so let’s look a bit deeper.  The idea behind a sin tax is that there are some activities that we, as a society, consider undesirable.  Cigarette smoking is a common example, although things like using alcohol or even sugary foods and drinks have also been included or considered as possible subjects of a sin tax.  We could ban them outright, the way we with illegal drugs, but that costs a great deal of money to enforce and restricts people’s right to smoke, drink alcohol, or eat a Twinkie if they so desire (lump those rights all under ‘pursuit of happiness’).

What if there were an alternative, a way to keep something legal but discourage people from using it?  One way might be to make it more expensive; if the cost of a package of cigarettes goes up, a smoker is going to be less likely to purchase as many packs.  Adding a tax to cigarettes makes them more expensive, decreasing how many cigarettes get purchased and smoked (and generating income for the government, as well).

Sin, in convenient stick form
Sin, in convenient stick form

There are several advantages to sin taxes, particularly from the government’s standpoint:

-Politically Easy: Creating a (balanced) budget is hard, particularly when government spending is up and tax revenue is down (just look at the legislators in Pennsylvania).  No politician wants to be responsible for cutting a popular program, but no politician wants to raise taxes either, because raising taxes on a broad swath of the voting public is a good way to get unelected.  Sin taxes, which by nature only target a certain group of individuals, are a good way to raise taxes and keep your office, too.

-Profitable: Taxes do serve a purpose, of course; without them government wouldn’t be able to do everything that we ask of it.  (We can have a discussion of governmental effectiveness even with tax money to fuel it another day; today, let’s just focus on the sinning and the taxes.)  Sin taxes, as with any taxes, are able to provide the government with money, which of course means the government likes to have them as an option.

-Steer People Toward Good Behaviors: The difference between sin taxes and most other types of taxes is that sin taxes encourage better behavior from people.  By making the ‘sins’ more expensive, people should logically choose to avoid them, opting for something less expensive and more sin-free.  If the government imposes a sin tax on bowling, for example, miniature golf could see a rise in participants; in the same way, the government can ‘nudge’ people away from whatever activities are considered improper.

All this sounds pretty good; why not get rid of those pesky income and sales taxes and simply tax sins to meet all our governmental spending needs?  Well, there are some drawbacks, as well:

-Makes the Government Dependent on Sinners: One problem with making a sin tax a major (or even minor) source of income is that the government then has a perverse incentive to keep people sinning.  As mentioned, Pennsylvania only managed to solve its budget crisis in part due to more revenue from smokers and cigarette taxes; if all the smokers in PA suddenly quit (or started bumming cigs from out-of-state friends), we’d be facing another budget shortfall next year.  Whether they admit it or not, this means that PA lawmakers need smokers to keep smoking (and paying taxes on) cigarettes; with that in the back of their mind, how hard are they really going to try to stamp out smoking?

-Can be Regressive: Since the taxes are the same on each pack of cigarettes regardless of the income level of those purchasing the pack, lower income people will end up spending a higher percentage of their money on the taxes than higher income people.  Two different pack-a-day smokers will spend the same amount in taxes (let’s say $1000, just so we have a number), but that represents a much larger portion of a $20,000 a year income compared to earning $100,000 each year.  (That’s before we even get into the argument that poorer people are more likely to smoke, drink or otherwise ‘sin’ than richer people, making them more likely targets of this tax already.)

-Involves Government Regulation of Personal Behavior: Even ignoring the economic effects of the tax itself, there’s still the little matter that sin taxes involve the government deciding which behaviors are good and which are bad, and attempting to punish the bad ones.  Since these behaviors are personal and affect only the individual*, why should the government be able to dictate its preferences of how to act?  (*Alright, this is an oversimplification; something like smoking can impact people other than the smoker, through second hand smoke and the effects of smokers in health care plans, among other things.  There are alternatives that address those issues (rules about where smoking is permitted and higher premiums for smokers) without the need to resort to taxing all cigarettes sold, though.)

The Final Word on Sin (Taxes)

So where does all this leave us when it comes to sin taxes?  They’re probably here to stay.  Remember that first ‘pro’ point, ‘Politically Easy’?  That alone will ensure that some form of sin taxes stay around in some form for the foreseeable future.  Also, compared to some of the alternative methods of dealing with unwanted behaviors, such as banning them the way we do with illicit drugs, legalizing, taxing, and generating profit from ‘sinful’ activities seems downright sensible.  Compare cigarette use to marijuana use, for example; which generates more profit for the government in the form of taxes, and costs less to regulate and control?

If I had just one wish when it came to sin taxes, it would be that governments wouldn’t depend so highly on them for income.  If the behavior is so sinful that we need to stop it, why should the government be in a position of depending on it for revenue?  I’d like to see politicians opt instead for the politically harder but less moral-twisting approach of getting rid of sin taxes and relying on other taxes to generate income.  If they do opt to continue the taxes, though, I’d love to see the money be funneled back into programs designed to truly eliminate the sin; not only do you get the sin tax money out of the general public coffers, but you deliver a one-two punch to whatever behavior you’re attempting to eradicate.

I’ll bet you a carton of cigarettes that that never happens, though.

5 Responses to What the Heck is a Sin Tax?

    • @sahmCFO: It is a tempting trade-off; certainly, as I mentioned, many politicians LOVE being able to fund programs and projects and pinning the costs on a relatively small group of the voters. I just worry that depending on people to keep sinning in order to fund vital projects (like children’s health-care) is not the best approach. It seems like a slippery slope to ‘If you want to keep your health insurance, kiddies, you have to get your parents to smoke more.’

    • @Monevator: Welcome to the blog! Ring-fencing sin taxes is one possible idea, but the problem rises again when you try to figure out where to put the ring. If you use cigarette taxes to fund health care, for example, (as with the SCHIP program mentioned by sahmCFO), then you find yourself in the odd position of promoting smoking to help people stay healthy. If you attempt to more narrowly limit the use of the money (for example, using taxes on alcohol to pay for drunk driving check points), you can avoid this kind of catch-22, but then funding for other programs needs to come from other, less politically palatable sources (the general public). I’m not sure there is a simple, easy to implement solution; if there was, I’m hoping that even the politicians we currently have would be able to cooperate and use it.

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