Private Judgments + Public Policy = Sin Taxes

Published September 1, 2006

There’s no question many government officials like “sin” taxes as a revenue source. Other lawmakers, and many of their constituents, like sin taxes because they impose a financial penalty on activities they dislike.

One person who has extensively studied how private moral judgments shape public policy is Christopher Z. Mooney, professor of political studies at the Institute of Government and Public Affairs at the University of Illinois-Springfield, editor of State Politics and Policy Quarterly, and author of The Public Clash of Private Values: The Politics of Morality Policy (Chatham House Publishers, 2001), a collection of articles by Mooney and others on the effects of private morality on public policy.

Budget & Tax News Managing Editor Steve Stanek recently spoke with Mooney on the policy questions surrounding sin taxes.

Stanek: Taxes on alcohol, cigarettes, gambling, and even gasoline seem to keep going up. What do you think when you see these tax hikes?

Mooney: People say these things are bad for public health, or they are bad for you as an individual, therefore we’re going to tax you. They have a rationale that says not only are we going to do this because you’re doing bad things, we’re doing this to help you. It will reduce your sinful behavior.

You don’t have to drink if you don’t want to. You choose to smoke. You choose to gamble. So you can engage in the sinful behavior and pay the tax or not engage in the sinful behavior and not pay the tax. The voluntary nature of these decisions makes it extremely attractive to raise these taxes, whereas raising the sales tax or income tax is like poison, even though these taxes are far more efficient and far more fair.

Stanek: Does the potential effectiveness of sin taxes in reducing harmful behaviors conflict with the goal of raising tax revenue?

Mooney: It is getting to the point that it’s having an impact. People are quitting smoking, smoking less, or moving to less-expensive substitutes. Big brands are losing market share, and they can cut back on what they pay the states under the Master Settlement Agreement.

[Editor’s note: In 1998 major tobacco companies and 46 states signed a Master Settlement Agreement, requiring the largest tobacco companies to make annual payments to the states to cover the “societal costs” of smoking. The companies have been paying about $6 billion annually, but earlier this year an arbitrator ruled that because their share of the tobacco market has fallen as a result of people turning to substitutes from companies that are not party to the agreement, the major tobacco companies may reduce annual payments to the states by about $1.2 billion. States are appealing the ruling.]

Stanek: Earlier this year we had an article on the arrests of several people in Michigan who police say were smuggling cigarettes and other items and sending millions of dollars to Hezbollah and other Middle East terrorist groups.

Mooney: We know that high tobacco taxes increase smuggling. Tobacco taxes have a huge variation from state to state. There is also variation in taxes on alcohol and motor fuel, but tobacco easily lends itself to smuggling. First, there are the huge disparities in taxes, and a high per cubic inch dollar value. And cigarettes don’t go bad quickly. It’s easy for the average person to go to North Carolina, where the cigarette tax is relatively low, fill up the trunk with cigarettes, and go to New York or Michigan (where cigarette taxes are much higher) to resell them.

Stanek: You mentioned other taxes are fairer than sin taxes. Why don’t politicians oppose sin taxes because of their unfairness?

Mooney: The obvious thing about sin taxes is they are easy to put on. They’re not huge generators of income; they don’t rise with inflation; they’re regressive. They’re everything you don’t want in a tax.

But in the case of sin taxes, expert opinion and rational assessment of objectives and criteria come smashing into political considerations. In this case, political considerations are going to win out. Vote for an income tax increase, and that will haunt a politician for 20 years.

Gambling taxes are not as regressive as some of the other sin taxes, though there is a lot of argument on that point. We think gambling taxes fall mainly on the middle class.

Stanek: Why do you think there is so much gambling now?

Mooney: Attitudes toward gambling is a whole issue itself. We used to think it was a sin. When I was a kid in Wisconsin, we couldn’t send in for contests on the backs of cereal boxes. Now before you hit Kenosha [a Wisconsin city on Lake Michigan just north of the Illinois state line] there are casino billboards, and in Kenosha there is a greyhound racing track.

Legalized gambling was one of the biggest changes in state policy in the last 25 years of the twentieth century. State lotteries went nuts.

One of the problems, and we’re seeing it in Illinois, is there apparently is a limit to the amount of revenue we can expect from gambling–and thank God for that. If people were going to be gambling unlimited amounts, that would be a scary prospect for humankind. Lottery sales are flattening. Casinos are no longer the goose that laid the golden egg. They are cannibalizing themselves in terms of market share.

States are not just allowing this to occur; they are now in the business of promoting gambling, and that raises public policy questions. Do we want state government promoting gambling? That’s a question in my mind.

There are those who argue there are social problems with gambling, and even after setting aside whether that is true, the tax issues and revenue issues with legalized gambling are complex and difficult for state governments to deal with in terms of what kind of rate should we set? How should we set up licenses? Should we auction off gambling licenses? And how should we regulate the industry?

Gambling was such a big change, such a fast change, it was thought it would be like other sin taxes: Free money. It has not turned out to be that easy.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.