Skip Navigation

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

May 18, 2017

States and municipalities looking to increase revenues are increasingly turning to “sin taxes” on everything from sugary drinks to cigarettes.

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.”

What We’re Working On

Budget & Tax
Research & Commentary: Oregon Lawmakers Should Heed Voters and Reject Gross Receipts Tax
In this Research & Commentary, Senior Policy Analyst Matthew Glans examines a new gross receipts tax proposal in Oregon. Glans says it would be very harmful to Oregon’s economic competitiveness and the state’s ability to attract new businesses. “Unlike corporate income taxes and sales taxes, gross receipts taxes apply to all transactions, including intermediate business-to-business purchases of supplies, raw materials, and equipment. This creates ‘tax pyramiding,’ the layering of taxes at each stage of production. The result is higher costs to consumers, who often have no idea how much tax they ultimately pay for their purchases. That violates the good-government principle of transparency,” Glans wrote. Read more

Health Care

Research & Commentary: North Carolina Should Not Expand Medicaid

In this Research & Commentary, Matthew Glans examines a proposed Medicaid expansion plan in North Carolina and argues against expanding the flawed program. “North Carolina legislators should continue to resist Medicaid expansion and instead reform their fiscally unsustainable program in ways that offer better care to enrollees and lower costs for taxpayers. North Carolina lawmakers should focus instead on reforming the current system and applying for waivers before choosing to expand it,” Glans wrote. Read more


Education

Wisconsin Schools of Choice Outperform Public Schools, Study Finds

In this article for School Reform News, Jenni White, cofounder of Restore Oklahoma Public Education, writes about a new study published by the Wisconsin Institute for Law and Liberty. The study shows private schools enrolled in choice programs and public charter schools in Wisconsin do better on the ACT and Wisconsin’s state assessment than their traditional public school counterparts when an apples-to-apples comparison is made. This means when factors such as poverty, race, and English language learners are taken into account and properly controlled for, researchers have found student outcomes on test scores are simply better in the private and charter sector compared to what’s occurring in traditional public schools. Read more


Energy & Environment

ICCC Panel Critiques Obama’s ‘Social Cost of Carbon’

In this story for Environment & Climate News, Heartland Policy Analyst Tim Benson reports on a lively panel at The Heartland Institute’s 12th International Conference on Climate Change in which the panelists discussed the role of cost-benefit analyses in shaping climate policy and the social cost of carbon (SCC) calculation set by the Obama administration. The social cost of carbon is based on a calculation designed to show the price of the global “damage” caused by releasing an extra ton of carbon dioxide into the atmosphere. It overstates the harm caused by carbon dioxide and understates its benefits. An Interagency Working Group set up by the Obama administration determined the SCC for 2016 to be $36 per ton. Panelists at ICCC-12 included Robert Mendelsohn of Yale University, Kevin Dayaratna of The Heritage Foundation, and Ross McKitrick of the University of Guelph. Read more


From Our Free-Market Friends

Back to the Staffing Surge: The Great Teacher Salary Stagnation and the Decades-Long Employment Growth in American Public Schools

In this second follow-up report released by EdChoice, Dr. Ben Scafidi, professor and director of the Education Economics Center at Kennesaw State University, measures U.S. public school employment growth versus student growth, as well as teacher salary fluctuations and student outcomes during the past 65 years. The results go against the grain of a common educational philosophy, that politicians should give public schools more money so they can pay teachers more and reduce class sizes. The first report in the series, The School Staffing Surge, was released in 2012, and the first follow-up, The School Staffing Surge Part II, was released in 2013.  Read more

Article Tags
Alcohol & Tobacco Taxes
Sub-topic
Taxes: Excise Tax
Author
John Nothdurft (john@heartland.org) joined the staff of The Heartland Institute in May 2008 as Heartland's legislative specialist on budget and tax policy. He was named government relations director in November 2010.
@thenoth