“Sin Taxes” Are Flawed Tax Policy

Published April 15, 2009

More than 20 states are considering “sin taxes”—such as excise taxes on tobacco, beer, and spirits—in order to shore up their budget deficits. But such taxes are badly flawed and likely to do far more harm than good to a state’s economy.

Sound tax policy adheres to four principles:

* Taxes should be applied to a broad base.

* They should be kept at or trimmed to a competitive low rate.

* They should be non-distorting.

* They should be completely transparent to taxpayers.

Disregard for these principles is exactly why excise taxes remain popular among politicians looking for the path of least resistance in order to fund their overextended budgets. Excise taxes fall directly on a much smaller share of the population than income or sales taxes; their rates are often exorbitantly high; and they are often deeply embedded in the products’ price in order to disguise their existence. According to Americans for Tax Reform, government taxes and fees make up 56.2 percent of the cost of beer, 79.6 percent of the cost of distilled spirits, and a whopping 81.3 percent of the cost of cigarettes.

Hiking already-high sin taxes will not reliably address state budget gaps, because with each tax hike, less revenue is generated. This is because tax hikes discourage use of a product, encourage consumers to cross state lines, or drive consumers into the black market.

Sin taxes are discriminatory and disproportionately burden lower- and middle-income people. Robert Sirico, president of the Acton Institute, notes sin taxes set “up a moral hazard for policy makers, who vacillate between wanting to discourage undesirable behavior and wanting to encourage it for revenue purposes.” He adds, “this moral hazard is especially dangerous for the poor, who spend a disproportionate amount of their income on products deemed sinful under a consumption tax.”

Many lawmakers misrepresent sin tax increases as the “silver bullet” that will fix their state budgets while affecting only users of the targeted product. But studies have shown that states with high sin tax rates also have higher overall tax burdens.

Lawmakers who genuinely seek to get their budgets under control should avoid hiking sin taxes and instead focus on principled tax reform, cutting spending to more responsible levels, and reforming unfunded liabilities.

The following articles offer additional information on sin tax hikes and their effect on state budgets.


Ten Principles of State Fiscal Policy
This booklet provides policymakers and civic and business leaders with a highly condensed yet easy-to-read guide to state fiscal policy matters. It presents the 10 most important principles of sound fiscal policy, from “Above all else: Keep taxes low” to “Protect state employees from politics.”

When Taxpayers Ignore Less Visible Taxes
The National Bureau of Economic Research analyzes the effect of sales taxes on consumption.

Excise Taxes Impose Growing Burden on the Poor
This Budget & Tax News article takes a look at how excise taxes affect the poor. The author notes, “if you want to help poor children, do not raise taxes on poor families.”

Research & Commentary: The Best And Worst Ways to Eliminate a Budget Deficit
This Research & Commentary, written by The Heartland Institute’s Budget and Tax Legislative Specialist John Nothdurft, takes a look at some of the best and worst ways states use to trim their budget deficits.

The Poor Need Help, Not Hidden Taxes
Columnist David Francis of the Christian Science Monitor takes aim at the disproportionate effect “sin taxes” have on the poor. “Because the poor tend to consume more of these items per capita than do those who are better off, poorer people bear a disproportionate share of that tax burden,” he writes.

General Taxes Out, ‘Sin’ Taxes Are In
This article from Budget & Tax News looks at why more states are considering “sin tax” hikes over broad-based tax hikes. It explains the dangers associated with the promise for higher health care spending attached to these tax hikes.

Taxing the Poor
The National Center for Policy Analysis’s Task Force on Taxing the Poor exposes how government unduly burdens its low-income citizens. It concludes, “Policymakers who consider raising excise taxes at the federal, state or local level—regardless of the good they think they are doing—should consider the disproportionate burden their lower-income constituents will bear.”

The Sin Tax: Economic and Moral Considerations
Robert Sirico, president of the Acton Institute, examines how the economic and moral considerations of “sin taxes” intersect and are not mutually exclusive. He warns, “we ought to consider fundamental issues regarding the interplay between private morality and public policy.”


For further information on the subject, visit the Tobacco Issue Suite on The Heartland Institute’s Web site at www.heartland.org.

Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. If you have any questions about this issue or the Heartland Web site, you may contact Legislative Specialist John Nothdurft at 312/377-4000 or [email protected].