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Why Sin Taxes Are So Good

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Why Sin Taxes Are So Good Why Sin Taxes Are So Good Let’s say you’re the government, and there’s an unhealthy, dangerous, costly and environmentally damaging behavior you want to discourage. Plus, you could use some revenue. A handy solution: sin taxes. They’re those benevolent or heavy-handed (depending on who you ask) revenue generators that want to change the world for the better. Call them misguided or enlightened, but sin taxes are here to stay–because they are so darn effective. In fact, you probably already pay at least one. What Merits Taxing? Three things are likely to get a sin tax passed: 1. An obvious externality. This is the side effect of a behavior from health care costs imposed on governments and insurance companies by things like obesity, smoking and deaths from drunk driving accidents. 2. Demonstrable benefit. If possible, legislators and voters like to see that a tax decreases the undesirable behavior before implementing it. 3. Revenue for a good cause. To convince citizens that a brand-new tax merits taking their money, tell them how you’ll spend it. Here are some notable examples of taxes that have passed with flying colors, as well as taxes that have utterly failed. 1. Cigarettes Smoking costs the U.S. nearly $200 billion in health care costs and lost productivity each year. All 50 states have a cigarette tax, ranging from $0.17 per pack in Missouri to $4.35 in New York. Stacked on top of this are separate taxes from the federal government, as well as many cities (New York City has a $5.85 total tax) and even some counties. It’s also the most studied tax, providing us a glimpse into the benefits and unintended consequences of sin taxes. In 2009, the federal cigarette tax rose from $0.39 to $1.01 per pack, lifting cigarette prices by 22% overnight. The tax reduced the number of smokers by about 3 million from 2009 to 2012, according to surveys from the Centers for Disease Control and Prevention. Unfortunately, the cigarette tax is regressive–it hits low-income people the hardest. Families earning less than $50,000 a year make up half the U.S. population, and two-thirds of smokers. In New York state, low-income smokers (earning under $30,000 a year) spend an astonishing 25% on average of their income on cigarettes. That’s more than we recommend you spend on all Lifestyle Choices combined! An easy fix to New York’s (and most other states’) low-income problem would be to use the tax revenue to provide free resources to help smokers quit. But like many states, New York funnels most of the tax revenue into the broader state budget.[6] According to a report by the American Lung Association, 42 states, plus D.C., failed to invest even 50% of what is recommended by the CDC in proven prevention programs. 2. Alcohol Alcohol taxes are de rigueur. As of September 2011, every state except New Hampshire taxes spirits–Washington state has the highest tax at $26.70 per gallon. States also levy lower taxes on beer and wine. According to the CDC, alcohol abuse costs an estimated $224 billion a year. The immediate and visceral effects of alcohol abuse (drunk driving accidents, especially among teens) means that taxing is widely accepted–82% of adults favor an increase of five cents per drink in the tax on beer, wine and liquor to pay for underage drinking prevention and alcohol treatment programs, according to the Center for Science in the Public Interest. Studies indicate that alcohol taxes can lower the costs of alcohol abuse by decreasing car crashes and fatalities, incidents of liver disease and violence. A 2012 report by the Center on Alcohol Marketing and Youth (CAMY) estimates that every $0.10 increase in the Maryland tax on an alcoholic drink would reduce alcohol consumption by 4.8%, and save $249 million in alcohol-related costs. 3. Junk Food and Soda Both Denmark and Hungary have introduced a fat tax or junk food tax, and France taxes sweetened drinks. Is the U.S. close behind? Obesity-related illnesses cost $147 billion to treat in 2008. Lab studies have found that junk food and sugary sodas produce addictive behavior in animals that’s similar to cocaine. However, the externalities of sugary soda aren’t as obvious as those of cigarettes and alcohol–there’s no such thing as secondhand fat. In a 2012 study, Oxford researchers recommended a 20% tax on sugary drinks, which they estimated would reduce obesity in adults by 3.5%. They chose to target sugary drinks because taxing junk food just prompts consumers to switch to another type of unhealthy food–as the Danes’ tax demonstrated–but taxing sugary drinks prompts a switch to water. But implementing a 20% tax will be a tough slog. While polls reveal U.S. support for taxing sweetened beverages at anywhere from 37% to 72%, former New York governor David Paterson’s 2009 proposal to tax sugary drinks at 18% failed, and Philadelphia mayor Michael A. Nutter’s proposal of two cents a drink fell flat. Twice. What Sin Is Next? Society is rife with ills to be remedied. Supporters for legalizing marijuana often cite the tax revenue it would generate. And there’s the carbon tax, which has had waxing and waning support over the past decade. As we’ve seen, activists will have a much better time getting their carbon tax passed if they can demonstrate that a.) it would reduce carbon emissions b.) carbon is definitively causing externalities, like hurricanes and flooding, and c.) the revenue would go to an appropriate cause. Maybe polar bear preservation? SIN TAXES DON’T WORK From alcohol to tobacco to sugary or caffeinated foods and beverages, price increases known as “sin taxes” that target politically incorrect products do little to limit their use and nothing to reduce alleged societal costs. That’s the finding of a newly published study, The Wages of Sin Taxes, by scholar Chris Snowdon. Most remarkably, Snowdon, a fellow at the Adam Smith Institute in London, demonstrates that financial burden supposedly placed on society through the consumption of alcohol, tobacco, high-calorie foods, has little basis in reality. The myth that these “sinners” cost the rest of us money is perpetuated in large part because “government has no incentive to tell the public that these groups are being exploited, and the affected industries dare not advertise the savings that come from lives being cut short by excessive use of their products.” This type of tax is actually a regressive “stealth tax” that allows lawmakers to take money from their constituents with the lowest incomes without the pushback an upfront tax would provoke. Certainly, many of those proposing price increases on so-called unhealthy products genuinely wish to improve the health of their fellow man and view these taxes as a means to that goal. Snowdon demonstrates that, regardless of their intended purpose, such taxes rarely produce the desired outcome many cases cause greater harm to those they are meant to help. Where most cost-of-sin studies merely examine the supposed costs drinking, smoking and eating fatty foods impose on society, The Wages of Sin Taxes takes a look at both costs and benefits to public finances. In fact, the vast majority of such costs are invented or are borne by the ‘sinner’ himself-not the public. Here are the relevant findings from The Wages of Sin Taxes: – “Sin taxes” are tax increases. Faced with his own budget deficit in 2009, President Barack Obama raised the federal cigarette tax by 156 percent,despite having promised a year earlier that, “no family making less than $250,000 a year will see any form of tax increase.” Largely as a result of the president’s U-turn, the federal government’s sin tax revenue—including tobacco, alcohol, guns,and ammunition—leapt from $14 billion in 2008 to over $20 billion. – States and cities levy sin taxes, too. As the recession deepened, state governments raised taxes on gasoline, tobacco, soda and bottled water. Colorado started taxing candy, Texas introduced a tax on lap dancing clubs, and several states contemplated a tax on pornography. Phoenix, Arizona, levied a 2 percent tax on all food to help pay off the city’s $277 million debt. When the policy encountered opposition from citizens, politicians considered taxes on tattoo parlors, strip clubs, and escort agencies, instead. – People are fooled. A 2008 poll of New Yorkers found that 52 percent would support a soda tax,but this rose to 72 percent when told the money would be used for “obesity prevention.” In reality, it is rare for the spoils of a sin tax to be spent as intended. Typically, the money raised goes toward routine government projects and debt payments. Of the $25.3 billion the U.S. government collected from state tobacco taxes in 2011, for example, less than 2 percent was spent on smoking cessation. – Oft-cited statistics are wrong. The most commonly cited U.S. cost-of-smoking estimate is $193 billion per annum. This figure appears to have no foundation in the academic literature and the calculations on which it is based have never been published in a peer-reviewed journal. The only source for the figure is a page on the Centers for Disease Control and Prevention’s website dating from 2008. No details are provided except that $96.8 billion is attributed to lost productivity and $96 billion is attributed to medical costs. The dearth of information makes it impossible to ascertain what proportion of these costs are private.
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