States across the nation have increasingly looked to sin taxes on tobacco, alcohol, and gaming to fix budget gaps, according to a report by Governing magazine.
One such proposal recently emerged in Anchorage, Alaska, where policymakers are considering a ballot measure that, if passed, would impose a 5 percent retail sales tax on alcohol. The revenues from the tax would be used to pay for homelessness and substance-abuse services. According to the Anchorage Daily News, the new tax would amount to “$0.40 for a six-pack of beer, $0.50 for a $10 mixed drink and $1.75 for a $35 bottle of wine and $2.50 for a $50 bottle of liquor.” If approved by the city’s Assembly, Anchorage voters would consider the tax hike on the April 2019 ballot.
This is not the first time the Assembly has considered an alcohol tax; similar efforts were introduced in 1994, 2015, and 2017. Supporters of the tax estimate it could raise $11 million to $15 million in new revenues.
Relying on sin taxes has proven to be a poor policy choice for governments across the country. Sin taxes are regressive, notoriously unreliable, and are often used to prop up unsustainable spending increases.
Unlike the more common tobacco tax hikes, most lawmakers have been reluctant to increase taxes on alcohol. All states already tax alcohol, but their rates vary widely. According to the Urban Institute, per-gallon alcohol tax rates range from 2 cents in Wyoming to $1.29 in Tennessee for beer, 20 cents in California to $2.50 in Alaska for wine, and $1.50 in Maryland and Washington, DC to $14.27 in Washington State for spirits. Unlike tobacco taxes, alcohol taxes have historically generated increased revenue. Adjusted alcohol tax revenue nationwide increased by 12 percent from 2008 to 2016.
However, despite these increases, critics argue this should not be used as a reason to rely on alcohol taxes. In a study by Pew Charitable Trusts, the authors warn lawmakers against leaning on high alcohol tax revenue in the long term because they say that alcohol consumption rates have been cyclical. “The average per capita alcohol consumption in 2015 was 2.3 gallons, down from the 1981 peak of 2.8 gallons (and up from the 1998 trough of 2.1 gallons). Given alcohol’s quantity-based tax structure and that usage ebbs and flows with societal trends and consumer whims, revenue gains may not always be a reality.”
The recent rise in alcohol consumption proves the taxes are ineffective in curbing alcohol use, which is an especially important point for Alaskans to consider, since the state has struggled to stop its alcohol and substance-abuse problems. According to a 2013 Anchorage Daily News analysis, the statewide alcohol tax imposed in 2002 did nothing to curb drinking. Further, from 2003 to 2009, state spending on substance abuse rehabilitation and prevention dropped.
Further, according to the National Institute on Alcohol Abuse and Alcoholism, alcohol tax hikes do little to discourage drinking among the 5 percent of consumers who are the heaviest drinkers—the demographic policymakers are most concerned about.
Sin taxes unduly burden moderate- and lower-income individuals. Tobacco taxes provide a good example of this phenomenon. According to the Tax Foundation, the average household in the lowest income quintile spends nearly double the amount in federal, state, and local alcohol taxes than households in the top quintile as a percentage of income. Instead of creating and increasing discriminatory taxes, city and state lawmakers should focus on tax reforms that lower rates, put dollars back into the pockets of taxpayers, and encourage government efficiency by placing reasonable limits on spending.
The following documents examine sin taxes in greater detail.
The Wages of Sin Taxes: The True Cost of Taxing Alcohol, Tobacco, and Other ‘Vices’
In this report by Christopher Snowdon of the Adam Smith Institute, the author outlines the case against sin taxes on cigarettes and alcohol. The report argues that taxes on commodities believed to be harmful to a person’s health or society are ineffective in reducing consumption and are not necessary for recouping lost revenue. Sin taxes are highly regressive and often force the poor to pay for the government’s mishandling of public finances.
The Dirty Dozen: 12 States That Bet Big on Sin
Nikhil Hutheesing of Bloomberg News examines the dozen states with the greatest percentage of total tax revenue derived from “sin.” Sin taxes in this article include tax revenue from tobacco, alcohol, and pari-mutuel betting, using data from the State Government Tax Collections survey produced by the U.S. Census Bureau.
Ten Principles of 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
Heartland Institute Government Relations Director John Nothdurft identifies the most and least effective ways states can trim their budget deficits.
Sin Taxes: Size, Growth, and Creation of the 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 lower-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries.
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 wrote.
Sin Taxes: When the State Becomes the Sinner
Andrew J. Haile uses the Master Settlement Agreement between the states and major tobacco companies to illustrate the moral hazard created when states become dependent on sin tax revenues. Haile also draws out lessons from states’ experiences with taxing tobacco products to identify problems to consider as state legislatures weigh whether to enact new sin taxes.
The Political Economy of Excise Taxation: Some Ethical and Legal Issues
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, such as smoking or consuming alcoholic beverages. In this article, Robert W. McGee examines the nonrevenue uses of excise taxes and analyzes their propriety from the perspectives of economics, law, and ethics.
The Economics of Sin Taxes
James Sadowsky considers sin taxes, how they affect the products they are imposed on, and the public’s recent backlash against such taxes.
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 website at http://news.heartland.org/fiscal, The Heartland Institute’s website 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 [email protected].