Anatomy of a Sin Tax

What’s the purpose of a tax?

This is a fundamental debate, yet it’s rarely examined beyond the surface mud slinging we see in a political fight. It comes down to two options, though: are we trying to raise money, or are we trying to influence behavior?

The tax code is riddled with examples of both. For example, you don’t hand out a mortgage interest deductions because Uncle Sam believes owning your own home will give you magical income producing properties roughly equivalent to a unicorn’s horn, you do it because the Real Estate Industry (full disclosure: of which I am currently a part) has convinced our elected overlords that houses are good.

I was going to make a joke about bribing our politicians with unicorns, but then I saw this picture and pictured the woman as Sarah Palin and couldn't stop laughing.

I was going to make a joke about bribing our politicians with unicorn horns, but then I saw this image and pictured the woman as Sarah Palin and couldn’t stop laughing.

If you tax something, you get less of it. If you provide incentives for something, you get more of it.

That brings us around to the sin tax. A sin tax, for a brief refresher, is a tax on something that people generally acknowledge to be, at least on some level, bad. Alcohol might be a social lubricant and a great way to reduce the frat boy count (ed note: way too morbid, Tim), but we all know it has a dark side.  Other popular sin taxes are tobacco and gambling.

The argument we’re given with sin taxes is that it’s something bad, so let’s tax it and get less of it. There’s some evidence that it works, too. A recent study out of the University of Florida concluded that a higher alcohol tax can actually lead to to fewer fatal car crashes.

That’s great! I’ll drink to that (caffeine-free diet Coke for me, please, since I’m Mormon).

Another headlining sin tax is the Junk Food tax. This relatively new tax was recently enacted in the so-left-wing-it-makes-China-look-moderate Berkeley and the Navajo Nation. Is it a good idea? I don’t know. Considering that a third of the Navajo have diabetes and that 80% of the food available to them is junk food, I can see why they’d want to do something–anything–to help.

The sin tax, though, is hinged on two fundamental questions. First, what right does the government have to decide what is a “sin?” Second, where does the money go?

The first question is a much better debate. Sin taxes are typically regressive taxes that falls heavily on the poorest on our nation. Our nation’s elite, most of whom are successful in part because they are not addicted to the very vices they’re taxing, are trying to legislate the drinkers, the smokers, the gamblers, the junk food addicts, many of whom are barely getting by, into being like them. While there might be tiny victories from the effort, like the Florida study mentioned above, most evidence I’ve seen show that such taxes rarely do much to move these “sins” on the consumption scale.

Or worse, it pushes purchases into the tax-evading black market.

Like everything else with our government, it should come down to cost vs. benefit. I typically fall into a more classical liberal economic philosophy of live and let live, but considering that I voted for heavy excise taxes on legal pot in Colorado, clearly my opinions are not completely cut and dry. Or consistent.

Now, the next question: Where does the money go?

That brings us back to why we’re raising these taxes. If we are creating the tax to reduce a certain behavior, the tax must go do something related. The Navajo Nation Junk Food tax goes to programs to help improve the health of their citizens, showing a consistency with their effort. A cigarette tax should go to helping with related problems such a lung cancer and disgusting yellow teeth. An alcohol tax should fund studies on how to apologize to your girlfriend when you drunk dial her in the middle of the night.

But where does the money typically go? Completely unrelated causes, of course. More and more, politicians see sin taxes as easy ways to raise revenue and plug budget gaps. It ends up leading to perverse behaviors, where politicians start lamenting the decrease of cigarette use since it requires them to go to a (self-perceived) over-taxed electorate asking for more money. Or enact budget cut. It’s so much easier just to throw a tax on the non-voting poor and take the cash to fund your pet projects.

Most sin taxes fall into that structure, where they tax X to help Y. Y, of course, gets addicted to the revenue produced by X, which pushes Y to want more of X, even though we really should be wanting less of X.

Want evidence that Berkeley politicians couldn’t give a rat’s sweet backside about how much soda it’s resident’s drink? The Soda Tax they enacted goes right into the general fund, to be spent however they please. While the politicians may not do it publicly, I can guarantee they’ll be ringing their hands behind the scenes if soda consumption starts to drop.

They say you know a politician is lying by if their mouth is open. If you want evidence that they’re lying, take a look at how they spend your money.

I don’t think the sin tax should necessarily be absolved. We just need to be more aware of what we’re voting on. If we’re raising a sin tax to stop a behavior, then the revenue better go to something relevant. If we’re raising a sin tax to bring in revenue, then we should know that too, and know who is most likely to bare the brunt of the cost.

What will fail us in the long run, though, is to try to have it both ways. Which is, since they’re politicians, what our elected officials continually try to sell us. But until there’s an actual fairy godmother behind the curtain, we shouldn’t believe a word of it.