It’s not too surprising that states often turn to “sin” taxes
for more revenues, especially
during downturns.
What’s worth noting is that legislators have become far more
creative in stretching the defintion of “disfavored” goods from the
traditional trio of alcohol, tobacco, and gambling to include
automobile tires, popsicles, amusement parks and vending machine
candy.
In a recent Mercatus study, “Sin
Taxes: Size, Growth and Creation of the Sindustry,” Adam
Hoffer, William Shughart and Michael Thomas show that the growth in
sin taxes is not only based on politicians’ flawed application (of
a debatable theory) of public finance, but that it has created the
“sindustry;” or, the increased lobbying activities of businesses
attempting to pre-emptively block taxes aimed at their products. In
2008, the soda industry spent $17.3 million on campaign
contributions. The fast food industry spent $12 million.
The classic economic justification for the “sin tax” can be
traced to the Pigouvian
tax. British economist Arthur
Pigou, theorized one could impose a tax on a good or activity
that produced “negative external effects” on a third party,
thereby improving social welfare. The tax would curb the behavior
and the revenues could be applied to addressing those negative
effects.
A few problems arise. First is how to set the tax. Most
economists believe it is difficult to
impossible to calibrate a Pigouvian tax because it involves
putting a monetary price on a social good. How much are you willing
to pay for gasoline to improve environmental outcomes 200 years
from now? Some sensitive economic assumptions and debated
scientific claims are involved here, as Pigou tax supporter
supporter
N. Gregory Mankiw notes.
But a subtle shift has happened in the public debate. Today’s
sin tax advocates are making paternalistic rather than Pigouvian
arguments. And they are targeting select consumer choices based on
dubious social welfare and health claims. Will taxing soda fight
obesity? Legislators’ ostensible concerns over public health often
confuse correlation and causation. In other words, not everyone who
drinks soda is obese. And obese people don’t necessarily drink
soda. If taxed high enough, obese soda drinkers could switch to
frappaccinos.
If the argument is that obese people pose a cost to society in
the form of higher health care expenditures, there are better ways
to internalize these costs. In theory, a more efficient (and truly
obnoxious) way would be to
directly tax obese individuals. The most efficient way to
internalize the social costs of obesity on health care would be to
allow insurance companies to
raise health insurance premiums for obese individuals.
Legislators’ love for fat taxes is less likely motivated by
improving health outcomes than it is by the
revenues that soda taxes reap.
To top it off, “sin” tax revenues are likely to end up in
general budgets rather than improving health outcomes. Nationally,
for every one dollar the states received from the Tobbacco
Master Settlement Agreement, only five
cents went to antismoking programs.
Perhaps it would be better if legislators simply dropped the
social welfare claims and admitted they have a revenue addiction.
Consider the strategy of legalizing the traditional “sins” in order
to tax them.
Casino gambling has spread to 23 states with gaming revenues
bringing in
$24 billion in FY 2010.
Most unusual is the extension of taxes to illegal drugs in
eleven states (assessed on those convicted of possession or sale).
North Carolina’s “Unauthorized
Substance Tax” allows the user to pay a tax in exchange for a
stamp to affix to the illegal subtance (including moonshine). Since
1990, they’ve collected $5,900. Most likely from
stamp collectors.
