The Spectacle Blog

The Perversity of Sin Taxes

By on 2.13.13 | 12:45PM

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.

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