Sin Tax

What Is a Sin Tax?

A sin tax is levied on specific goods and services at the time of purchase. These items receive the excise tax due to their ability, or perception, to be harmful or costly to society. Applicable items include tobacco products, alcohol, and gambling ventures. Sin taxes seek to deter people from engaging in socially harmful activities and behaviors, but they also provide a source of revenue for governments.

Understanding Sin Taxes

Sin taxes are typically added to liquor, cigarettes, and goods that are considered morally hazardous. Because they generate enormous revenue, state governments favor sin taxes. Society accepts sin taxes because they affect only those who use sin taxed products or engage in sin taxed behaviors. When individual states run a deficit, a sin tax is generally one of the first taxes recommended by lawmakers to help fill the budget gap.

A sin tax is a type of Pigovian tax, which is levied on companies which create negative externalities with their business practices. Sin tax proponents maintain that the targeted behaviors and goods produce negative externalities. In other words, they foist an unfair burden on the rest of society. The effects of alcohol and tobacco products increase health care costs driving up the cost of insurance for everyone. Also, compulsive gambling compromises the security and well-being of stable home life, children, and families of the gambler.

One purpose of a Pigovian tax is to create an incentive to reduce negative externalities. The sin tax seeks to reduce or eliminate consumption of harmful products by making them more expensive to obtain.

Key Takeaways

  • A sin tax is an excise tax placed on certain goods at time of purchase.
  • The items subject to this tax are perceived to be either morally suspect, harmful, or costly to society.
  • Examples of sin taxes include those on cigarettes, alcohol, gambling, and even sugary drinks.

Criticism of Sin Taxes

Imposing a sin tax does not come without criticism. Small-government conservatives argue that a sin tax represents an overreach of government. Critics allege that by singling out specific products or services for additional taxation, the government is engaging in social engineering and taking on the role of a nanny state.

Similarly, pundits on the left take issue with a sin tax because it tends to create a disproportionate effect on the poor and the uneducated. For example, there is empirical evidence that the rate of smoking is inversely related to education. Dropouts and high-school graduates have a higher probability, based on historical usage data, to use tobacco products than those people with advanced degrees.

Moreover, sin taxes are typically regressive taxes, meaning the less money a person makes, the more significant is the percentage of their income these taxes consume. A pack-a-day smoker who makes $20,000 per year spends the same money on cigarettes, and therefore, the same on cigarette taxes, as one who makes $200,000 per year. However, the taxes the lower income consumer must pay represents a more substantial portion of the paycheck.

Article Sources
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  1. Internal Revenue Service. "Understanding Taxes - Student, The Whys of Taxes, Theme 5: Impact of Taxes, Lesson 1: How Taxes Influence Behavior," Accessed Dec. 7, 2019.

  2. Preventive Medicine. "Cigarette Smoking Behavior Is Strongly Related to Educational Status: the CARDIA Study," Accessed Dec. 7, 2019.

  3. The National Bureau of Economic Research. "Regressive Sin Taxes," Accessed Dec. 7, 2019.

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