State governments collected approximately $32 billion in 2014 by taxing “sinful” products and activities, including gambling, smoking, and alcohol.
Legislators are generally motivated by their constant search for new tax revenues to support services their constituents want (but aren’t willing to pay for themselves), and taxing something that is widely viewed as bad or sinful seems to be the least-offensive way to go about it. But relying on sin taxes is poor tax policy: They are regressive, unreliable, and unrelated to the benefits of public services financed by their revenues.
Sin taxes have a strong detrimental effect on local small businesses because consumers vote with their feet and buy products outside the city, county, or state imposing the tax. Sin taxes tend to be shifted to other products when revenue runs short of expectations. While many states now levy sin taxes on tobacco and alcohol, new sins are being identified by hungry tax collectors: soda pop, plastic bags, tanning beds, and even gym shoes.
Sin taxes should be avoided because they distort the market and encourage unsustainable increases in government spending while placing an unnecessary burden on lower-income taxpayers. Instead of creating and increasing discriminatory taxes, states should focus on tax reform that lowers rates, puts dollars back into the pockets of taxpayers, and tightens states’ budgets by creating new, reasonable limits on spending.