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Tax Newsletter

“Sin Taxes” on Alcohol, Tobacco and Gambling

To compensate for budget deficits and a poor economy, many states have imposed higher taxes on behaviors that have traditionally been perceived as “bad” habits – smoking, drinking and gambling. The people targeted by such taxes might find them discriminatory and unjustifiably paternalistic, but “sin taxes” are completely legal. In fact, while taxes vary from state to state, $12.4 billion in revenue was raised from “sin taxes” in 2012!

The Purpose of “Sin Taxes”

Tacking higher taxes onto cigarettes, beer and gambling serves a two-fold purpose:

  • The Paternalistic View – States can discourage habits they consider “bad,” on the theory that people do not know what is bad for them, and
  • The Individualistic View – Since states have to bear the cost of drunk driving and secondhand health issues, they should be able to “punish” personal behavior traditionally perceived as detrimental to the public good, such as drinking and smoking

In addition, sin taxes are easier to increase than general taxes because not everybody drinks, and smoking is becoming increasingly unpopular. Accordingly, politicians can claim that they have not raised income taxes by targeting smokers, drinkers and gamblers, to boost popularity with the majority.

The Drawbacks of “Sin Taxes”

Low-income people are most affected by “sin taxes,” because they spend a higher percentage of their incomes on cigarettes than high-income people. And since the tax on top-shelf and well liquor is the same, those who buy top-shelf pay a smaller portion of the price in taxes. The disproportionate consequences of “sin taxes” mean that the people who face the greatest burden when a state imposes a heavy levy are those who can least afford it.

Detractors of “sin taxes” might argue that, while the secondhand health issues raised by smoking justify “sin taxes” on cigarettes, “sin taxes” on alcohol are not necessarily justified. Such individuals feel that reprimanding alcohol consumption via a “sin tax” affects all people who consume alcohol, even if they do not abuse it or drink and drive.

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