What is a 'Sin Tax'

A sin tax is a state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. These types of taxes are levied by governments to discourage individuals from partaking in such activities without making the use of the products illegal. These taxes also provide a source of government revenue.


Sin taxes are typically added to liquor, cigarettes and other non-luxury items. State governments favor sin taxes because they generate an enormous amount of revenue. The general public usually accepts sin taxes because they are indirect taxes that only affect those who use the products. When individual states run deficits, a sin tax is typically one of the first taxes recommended by lawmakers to help fill the budget gap.

Additional Arguments in Favor of Sin Taxes

A sin tax is a type of Pigovian tax, which is levied on companies that create negative externalities with their business practices. Sin tax proponents maintain that the behaviors being taxed represent negative externalities, as they foist an unfair burden on the rest of society. The harmful effects of alcohol and tobacco increase health care costs, while compulsive gambling often forces families into bankruptcy and financial ruin.

One purpose of a Pigovian tax is to create an incentive to reduce negative externalities. The sin tax accomplishes this purpose, as higher costs through taxation encourage consumers to spend less on harmful products.

Criticism of Sin Taxes

The practice of levying sin taxes draws criticism from both ends of the political spectrum. Small-government conservatives argue that a sin tax represents an overreach of government. These critics allege that by singling out certain 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, studies indicate that smoking rates have a strong inverse correlation with educational attainment; those with a high school education or lower are much more likely to partake in tobacco use than those with a bachelor's degree or higher.

Moreover, sin taxes are typically regressive taxes, meaning the less money a person makes, the larger percentage of his 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 eat up a much bigger portion of the low earner's paycheck.

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