Policy Documents

Research & Commentary: Sin Taxes

August 27, 2013

According to a report by 24/7 Wall St., state governments collected more than $50 billion in “sin taxes” in 2011 from several products and activities including gambling, smoking, and alcohol consumption. The report found that Nevada, Rhode Island, Delaware, West Virginia, and New Hampshire (in that order) relied the most heavily upon sin tax revenues as a percentage of total state revenues.

The two primary motivations that legislators have for implementing and raising sin taxes is the desire to combat what they deem an unhealthy or immoral behavior and the opportunity to create or expand a revenue stream to bring in more money. Relying on sin taxes has proven to be poor tax policy due to being regressive, notoriously unreliable, and because such taxes are often used to prop up unsustainable spending increases.  

Lastly, sin taxes unduly burden moderate- and low-income individuals. A good example of this is found with tobacco taxes: According to the Bureau of Labor Statistics, 95.8 percent of tobacco expenditures are made by consumer households earning less than $150,000 a year.

Sin taxes have a strong detrimental effect on local small businesses; when they are implemented, retailers and wholesalers find themselves with decreased sales as consumers seeking to avoid the tax vote with their feet and buy products outside the state, city or county imposing the tax.

Sin taxes have demonstrated a tendency to be shifted to other products when their revenue runs short of expectations. While many states now levy sin taxes on tobacco and alcohol, other new sin taxes are beginning to expand to other subjectively determined items like soda pop, plastic bags, and tanning beds.

While sin taxes do sometimes result in increased revenue over the short term, they often lead to an even greater increase in expenditures that often cannot be supported by the tax over the long term, thereby creating budget shortfalls. High sin taxes by design aim to discourage certain product consumption or actions but they also encourage smuggling and other illegal actions.

Sin taxes should be avoided because they distort the market and encourage unsustainable increases in government spending while placing an unnecessary burden on lower-income taxpayers. Instead of creating and increasing discriminatory taxes, states should focus on tax reform that lowers rates, puts dollars back into the pockets of taxpayers, and tightens states’ by creating new, reasonable limits on spending.

The following literature examines sin taxes from multiple perspectives.

States Profiting the Most from Sin - 24/7 Wall St.
http://247wallst.com/special-report/2013/08/16/states-profiting-the-most-from-sin/
Using data from the Census Bureau and the American Gaming Association, Michael B. Sauter, Alexander E. M. Hess, and Thomas C. Frohlich of 24/7 Wall St. identify in this report the states where the largest percentage of revenue came in the form of proceeds from alcohol, tobacco, and casino taxes, as well as the lottery and state-regulated liquor stores.

The Dirty Dozen: 12 States That Bet Big on Sin
http://www.bloomberg.com/money-gallery/2013-06-26/the-dirty-dozen-12-states-that-bet-big-on-sin.html#slide12
Nikhil Hutheesing of Bloomberg News examines the dozen states with the greatest percentage of total tax revenue derived from “sin” ranked from least to most. Sin taxes in this article included tax revenue from tobacco, alcohol, and pari-mutuels provided by the State Government Tax Collections survey of the U.S. Census Bureau. 

Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
http://heartland.org/policy-documents/research-commentary-best-and-worst-ways-eliminate-budget-deficit
John Nothdurft, government relations director at The Heartland Institute, identifies some of the most and least effective and economically advisable ways states use to trim their budget deficits. 

Sin Taxes: Size, Growth, and Creation of the Sindustry
http://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries.  

Taxing Sin
http://heartland.org/policy-documents/taxing-sin
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation,” they write. 

Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
http://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-raise-tobacco-taxes
Heartland Institute Government Relations Director John Nothdurft contends targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned with the public health effects of tobacco should encourage the use of readily available smoking cessation products and services, instead of supporting bad tax policy. 

Sin Taxes: When the State Becomes the Sinner
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1425621
In this paper, Andrew J. Haile uses the Master Settlement Agreement between the states and major tobacco companies to illustrate the moral hazard that is created when states become dependent on sin tax revenues. Haile also draws out lessons from the states’ experience with taxing tobacco products to identify issues that should be considered as state legislatures weigh whether to enact new sin taxes.

The Political Economy of Excise Taxation: Some Ethical and Legal Issues
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=251483
Excise taxes are used not only to raise revenue but also to alter or punish behavior. In many cases, excise taxes can be called "sin" taxes because they punish people for politically incorrect behavior like smoking and consuming alcoholic beverages. In this article Robert W. McGee examines the nonrevenue raising uses of excise taxes and analyzes their propriety from the perspectives of economics, law, and ethics.

The Economics of Sin Taxes
http://www.acton.org/pub/religion-liberty/volume-4-number-2/economics-sin-taxes
James Sadowsky writes in this Action Institute piece about the sin tax, how the tax effects the products it is imposed on, and the public’s recent backlash against the tax.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org. 

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.