Why Sin Taxes Are Problematic at Best
Taxes on Alcohol, Tobacco, and Soda Not as Attractive as They Seem
Sep 29, 2009
In recent months, there have been efforts at the federal, state, and even local government levels to institute a tax on the sale of sugary soft drinks. The logic goes something like this: the public’s intake of sugary soft drinks contributes to obesity. Obesity leads to increased health care costs, so it is only fair to collect extra taxes to pay for the health care costs involved.
However, it is no secret that proponents intend the tax as much to influence behavior as to raise funds. Even President Barack Obama, in a recent interview with Men’s Health magazine, said that “... if you wanted to make a big impact on people’s health in this country, reducing things like soda consumption would be helpful.” But what are the ramifications for society of using taxes to control the public’s behavior?
The Legal Basis for Imposing Taxes to Motivate Behavior
So-called “sin taxes” — those on alcohol, cigarettes, and now potentially on sodas — are known in legal terms as “excise taxes”. An excise tax, according to the Internal Revenue Service website, is a tax paid upon purchase of a specific good, or upon engaging in some activity. Unlike the power to tax income, which had to be ratified in a Constitutional amendment, the power to impose excise taxes was granted to Congress in the original text of the Constitution (Art. 1, § 8).
Of course, given such broad power to decide what to tax, the temptation arises to use that power in order to create secondary consequences; attempts by Congress to do so have resulted in Constitutional challenges. These challenges have largely been decided in favor of Congress, because, as the Supreme Court noted in United States v. Doremus, “The act may not be declared unconstitutional because its effect may be to accomplish another purpose as well as the raising of revenue.” Such taxes are only unconstitutional if they violate some other right listed in the Constitution.
Economic Challenges of Imposing Sin Taxes
To the degree that sin taxes make sense, it is because they cause people to pay for the ramifications of their undesirable behavior. However, such taxes are economically problematic because they are regressive, in more than one sense. In recent common usage, a regressive tax is considered to be one that makes a harder impact on those who make less money, rather than the wealthy. Sin taxes often do have such an effect, as poor health habits often correlate with lower incomes.
Sin taxes are also regressive in the traditional sense of the word. If the intent works, and the behavior is discouraged, sales of the offending item will drop. Therefore, the sin tax revenue will drop as well. The only way to keep a sin tax revenue-neutral is to continue to raise the tax as the behavior is eradicated; this is a regressive tax that cannot sustain itself as a revenue source.
Finally, if sin taxes work as they are intended, they can damage the economy as a whole. The Tobacco Institute estimates that the tobacco industry in the United States supports over 1.5 million workers directly. It is worth asking whether the potential revenue from a sin tax is worth the potential loss of jobs if the tax works as intended and production of the item is decreased or eliminated.
Moral Ramifications of Legislating Behavior Through Tax
Sin taxes have largely been accepted because they are based on good intentions. It becomes easier to sell the idea of taxing a specific behavior if that behavior is considered to be universally detrimental or potentially harmful to others, such as smoking or drinking alcohol. The argument has to be stretched a bit more thin in the case of soda, as it is more difficult to make the argument that an individual’s dietary habits are harmful to anyone else. Enter the recent health care debate, in which the possibility of taxpayers potentially paying for others’ medical expenses gives some legitimacy to controlling how others take care of themselves.
The logic seems so simple at first. But the question cannot be ignored — are good intentions enough to override personal freedoms? At what point are Americans willing to hand over more and more control of their lives in order to make sure that revenue is raised by taxes those who can somehow be considered morally inferior? Is it appropriate to impose taxes that hit lower income taxpayers harder because the government assumes itself to be capable of better decision-making than the poor?
And most importantly, does America really want to be a country that bullies its citizens into submission just because a certain behavior is so unpopular that no one raises an argument?
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