Reinventing the Case for the Sin Tax

Quite frankly, the debate over sin taxes fails to elicit the histrionics and brouhaha characteristic of battles over more “relevant” issues like health care and gun control. As an excise duty, the sin tax affects only a specific sector of the market whose patrons tend to be poor and uneducated, and as a source of revenue, it pales in comparison to the federal income tax (Lubov 35). In terms of perceived importance, the revenue that it does produce is often put to the decidedly inglorious tasks of educational programs and road repairs (36). It should come as no surprise, then, that the sin tax is often glossed over by voters and relegated to the back of the legislative filing cabinet. Nevertheless, its unfortunate lack of prominence does not excuse the sin tax debate from closer scrutiny.

Put simply, a sin tax is a form of an excise tax—one that is levied on a specifically defined good or commodity within a country (Hoe). These goods and commodities may encompass a wide variety of products, namely cigarettes, beer, pornography, prostitution, soda, and ammunition. These commodities are distinguished from most other consumer products in that they tend to produce externalities, an economic term defined by Auburn University professor Dr. Paul M. Johnson as “situation[s] in which the private costs or benefits to the producers or purchasers of a good or service differs from the total social costs or benefits entailed in its production and consumption” (Johnson). Pollution from automobiles is one example of an externality; environmental contamination is one inadvertent and wide-ranging effect, or cost, resulting from the production and purchase of cars. In this respect, a sin tax could also be classified as a Pigovian tax—one that is levied on market activities that generate negative externalities in an attempt to account for, or internalize, those costs. A series of studies conducted in California provide evidence of externalities resulting from cigarette consumption; the studies show the average “lifetime health cost of a smoker [to be] $16,000 more than [that of] a nonsmoker” (Calvan). However, a sin tax is instated in the hopes of compensating for, rather than preventing (the reason for which will be discussed later), the effects of these negative externalities. This compensation may come in many forms, ranging anywhere from repairing guardrail damage resulting from drunk driving accidents to funding the purchase of new hospital sickbeds to accommodate smokers who have contracted lung cancer. This argument from externality is one of the two major justifications offered for the use of a sin tax. It is, as will later be discussed, the superior justification of the two.

Alternatively, some class the sin tax as a moral check on society that proscribes certain undesirable behaviors by putting a premium on those behaviors (Hoe). This stance, which will henceforth be referred to as the moral argument, appears to be the clearest and most evident function of a sin tax (the name “sin tax” certainly suggests it). However, careful analysis shows the moral argument to be economically unsound and therefore an unsuitable platform for arguing in favor of the sin tax. Unlike the externality argument, the moral argument views the sin tax as a vehicle of the government used to discourage undesirable behaviors through price deterrence (ibid.). It relies on the assumption that demand for the “undesirable” goods is elastic—that changes in price will yield linear changes in demand. This supposition, however, fails to recognize that demand for those goods is actually more or less inelastic (Rampell). Gasoline exhibits inelastic demand because of its status as a virtual necessity; regardless of whether a gallon of gas costs $1.50 or $4.00, people will still need to drive. Similarly, because so many popular commodities subject to the sin tax (e.g. alcohol, tobacco, pornography) are by nature addictive, their consumers are unlikely (or are unable) to stop purchasing them even if the price is raised considerably (ibid.). Only when the price is inflated to a truly extravagant amount will demand begin to waver. But to assume this to be the first sign of success would be a painful naivety—on the contrary, it raises alarming questions as to the prospect of newly formed black markets and illegal trade networks (ibid.). For at this point, consumers are faced with an ultimatum: (1) to comply with the law and be limited immensely in their purchasing power of the now prohibitively expensive good, or (2) to illicitly obtain the good at more affordable prices from dealers. When the cost of legally obtaining a good exceeds the bounds of reasonability, the incentive to circumvent the law prevails, and it is at this point that one observes the rise of underground cartels that can efficiently evade authority and mass-distribute the good in question (ibid.). A sin tax can therefore never be set at a rate deemed inordinate by a majority of the taxpayer population for fear of invigorating criminal enterprises. Consequently, without the ability to inflate the price to a point high enough to influence inelastic demand, neither can a sin tax effectively proscribe behavior. The main tenet of the moral argument thus rendered null, the externality argument can take its rightful place in the spotlight of the pro-sin tax platform.
Arguments against the sin tax are numerous. Major points of contention include charges that a sin tax is regressive (disproportionately burdens the poor), that it is ineffective at proscribing behavior, and that it encourages frustrated consumers to obtain their sin-taxed commodities illegally (Sirico). Enter the keywords “sin tax” into any major search engine and one will encounter a barrage of anti-sin tax arguments coming anywhere from nationally-syndicated opinion-editorial columns to personal weblogs. Pro-side arguments are found few and far between. However, nearly all of the anti-sin tax arguments share something in common: their attacks focus overwhelmingly upon the moral argument rather than the externality argument. But with the moral argument having been eliminated from the pro-sin tax platform, so have the accompanying attacks upon them by the opposition.

If the principles of the externality argument are faithfully adhered to, then the vast majority of the charges aimed at the sin tax (which rebut the moral argument) are indeed effectively negated. This requires a purist approach—that is, that the revenue gleaned from sin taxes must be used for the sole purpose of offsetting negative externalities. Diverting revenue to fund social welfare programs, for example, is an attractive but ultimately unreliable prospect (Calvan). Suppose that a portion of the revenue from the cigarette tax is channeled into funding public schools. The school districts, in anticipation of the incoming funds, plan their budgets accordingly. But now suppose that cigarette sales plummet that year, owing perhaps to the increasing prevalence of smoke-free public areas. The school districts are then faced with the looming specter of massive debt, with little or no recourse. For the type of sin tax proposed by those who still wish to glean some additional benefit from its revenues, this scenario is a very real danger. In the summer of 2010, the state of California faced a substantial budget shortfall due to an unexpected drop in tobacco tax revenue, with Robert Phillips, director of health and human services for the California Endowment, describing it as a “‘double slap’” in terms of lost tax revenue and the shorted budget (ibid.). Once the sin tax is used as a crutch to close gaps in the budget, the fate of the budget depends on consumers to meet a certain quota in the purchase of the sin-taxed commodity—by any measure, a poor bet to ensure financial security.

One of the most common attacks against the sin tax contends that it is fallacious to expect to raise revenue while simultaneously trying to discourage the activity that brings in revenue (Duffy). This accusation of the conflict of interest inherent to a sin tax, although applicable to the moral argument platform, does not apply to that of the externality argument, since the externality argument makes no such claim of trying to influence behavior through the tax. A more accurate label for the sin tax of the externality perspective might perhaps be that of a reactionary tax, since the tax aims only to redress the negative externalities generated by the use of a taxed commodity. It does not (and should not) attempt to generate a surplus in revenue, as this would amount to the tax overstepping its authority to balance negative externalities. A surplus would imply that the tax is bringing in more money than is needed, in which case the tax rate should be adjusted accordingly to match the necessary amount. Should the surplus be used to fund other federal projects, the proponents behind the sin tax could technically be charged with consumer discrimination; by paying the sin tax, consumers essentially absolve themselves of responsibility for their negative externalities, and it is therefore unfair to expect them to continue to fund unrelated government projects based on their consumer habits.

A July 2009 report compiled by writers at the Mercatus Center at George Mason University presents a detailed case against the sin tax that summarizes, to a large degree, the points of consensus among those opposed to sin taxes (Williams). The report enumerated five “myths” of the argument in favor of sin taxes: (1) “Sin taxes discourage unhealthy behaviors,” (2) “Sin taxes are a good way to raise revenue,” (3) “Primary support for sin taxation comes from civic-minded citizens,” (4) “Sin taxes are fair,” and (5) “Sin taxes are the best way to change undesired behavior” (ibid.). Since the argument from externality does not concern itself with influencing consumer behavior or raising revenue for use outside of cost internalization, “myths” numbers one, two, and five can be eliminated immediately from consideration. In their explanation of Myth Three, the authors contend that the major driving force behind sin tax legislation originates from large special interest groups rather than from concerned citizens. They present as evidence a case study of a “1987 lobbying effort by a coalition of nonprofit organizations to more than triple California’s cigarette tax,” presumably staged in order for the organizations to collect the spoils of the ensuing tax revenue, which were slated to pour into the coffers of anti-smoking nonprofit agencies (ibid.). Although the authors raise a valid legal and ethical concern, the provisions made by the externality sin tax would, as mentioned earlier, lock in the tax rate at a level that would evenly match the cost of offsetting negative externalities. Since this policy does not permit surplus tax revenue, the 1987 effort to triple the tax rate could not have been proposed in the first place. More importantly, the fact that several nonprofits attempted to manipulate the California cigarette tax provides no compelling reason for tax reform. Instead, the authors seem to have failed to pinpoint the true source of the problem—lobbying. In Myth Four, the authors contend that sin taxes unfairly burden consumers on the lower end of the socioeconomic scale, who must pay a proportionally larger chunk of their income to meet the tax (ibid.). In making this claim, the authors have committed an instance of faulty reasoning. Consider the following example: by both choosing to smoke cigarettes, a rich man and a poor man commit the same negative externality of exposing others to secondhand smoke. The fact that one man is wealthier than the other is wholly irrelevant to the issue of an external cost like secondhand smoke, the effects of which originate from the product itself (cigarettes), and which are unaffected by the particular consumer of that product. Because the sin tax is calculated on a per-externality basis, it cannot rightfully be called discriminatory based on socioeconomic status.

A movement to rebrand the pro-sin tax side of the debate as the side of the argument of externality rather than the argument of morality will do more than to advance the debate itself. It will perhaps rekindle interest in sin taxes as a part of fiscal policy and inspire reform in existing locales—and hopefully allow the sin tax to shed its shell of obscurity to take a real stand in the American political arena.

Works Cited
Calvan, Bobby Caina. “Plummeting cigarette sales cut California tax revenues.” The Sacramento Bee, 28 Jul 2010. Web. 25 Feb 2011.
Duffy, Brian. Cartoon. Des Moines Register 2 Apr 2008. Web. 23 Feb 2011.
Hoe, Kang Ben. “The role of excise as a sin tax.” The Star Online, 2010. Web. 24 Jan 2011.
Johnson, Dr. Paul M. “A Glossary of Political Economy Terms.” Auburn University. Web. 25 Feb 2011.
Lubov, Andrea. Taxes and Government Spending. Minneapolis: Lerner Publications, 1990. 35-36. Print.
Rampell, Catherine. "Cash-Strapped States Turn to Sin Taxes." The New York Times, 17 Apr 2010: n. pag. Web. 24 Feb 2011.
Sirico, Robert A. “Hate the Sin, Tax the Sinner?” The American, 2009. Web. 23 Jan 2011.
Williams, Richard, and Katelyn Christ. “Taxing Sin.” George Mason University. Jul 2009. Web. 24 Jan 2011.

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