The Leaflet: The Intended and Unintended Consequences of ‘Sin Taxes’

Published May 18, 2017

States and municipalities looking to increase revenues but not wanting to raise broad-based taxes on sales or income often turn to implementing “sin taxes” on everything from sugary drinks to cigarettes. This isn’t a new phenomenon in the United States. Excise taxes on targeted goods such as tobacco and alcohol date back to the Revolutionary War.

Supporters argue so-called sin taxes are one way to curtail behaviors considered by lawmakers to be “bad” or to encourage some greater public health goal. As economists note, if you tax something, people will buy less of it. Unfortunately, not all sin taxes are created equally, and the unintended consequences of these levies can often be counterproductive to the stated and unstated goals of the tax.

For instance, if rates are set too high then there will be significant tax avoidance due to smuggling and the creation of a black market. According to an article published by Stateline, “In 2010, states with high tobacco taxes lost about $5 billion in revenue because of cigarette smuggling, according to the Bureau of Alcohol Tobacco Firearms and Explosives. Experts say the number is climbing.”

Similarly, on the social-benefit side of the coin, sin taxes can alter behavior, but not always in a positive way. According to a many studies, taxes on sugary drinks often cause people to switch to other calorie-rich drinks, including beer. There is often a negligible positive effect after sin taxes are instituted, and sometimes, the intended objective is negatively affected.

Additionally, there are significant negative economic impacts on local businesses as a result of many sin taxes, which means tax revenues are often unreliable and sometimes even decrease. According to a Tax Foundation analysis of the stability of cigarette taxes authored by Scott Drenkard and Tom VanAntwerp, “Across almost all states, tax rate hikes are met with a momentary bump in revenue, followed by a falloff in collections in future years.”

In a recent Research & Commentary, Heartland Institute Senior Policy Analyst Matthew Glans wrote, “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 seek to avoid the tax by purchasing products outside the county, city, or state imposing the tax. While sin taxes do sometimes result in increased revenue over the short term, they often lead to an even greater increase in expenditures, which often cannot be supported by the tax over the long term, thereby creating budget shortfalls.”

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