Does a Sin Tax on Alcohol, Tobacco, and Marijuana Drive Away Business?

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The sin tax is nothing new. Whether it is alcohol, cigarettes, gambling, or marijuana, states have had their hands in the taxation of these “sinful” products to reduce consumption and collect money for years. In fact, the federal government has enforced sin taxes in America ever since George Washington ordered 13,000 militia troops to squash the 1794 Whiskey Rebellion in Pennsylvania.

Washington State recently began to consider a new sin tax, this time on the sale of e-cigarettes. This tax might sound like a great plan to reduce smoking and raise much needed state revenue. On the other hand, it could do more harm than good by driving business to cheaper products, alternatives, or even the black market.

E-Cigarette Tax: Different Product, Same Concept

Don’t let the name confuse you. An e-cigarette still contains nicotine, so the new tax proposed in Washington in March is a sin tax.

Washington plans to tax e-cigarettes at 95 percent, which is the same rate at which the state taxes regular tobacco products. Opponents fear the increase will have a negative effect on the reduction of regular tobacco use, a process that would reduce the amount of secondhand smoke exposure.

However, the bill’s sponsor, Representative Gerry Pollet, believes it’s important to send a message to e-cigarette users that just because they don’t see smoke doesn’t mean that e-cigarettes aren’t dangerous.

This Pacific Coast state isn’t alone; Ohio’s governor has proposed a similar sin tax on the liquid nicotine that e-cigarette pipe use, which would almost triple the price if it passes.

It’s understandable that state leaders want to safeguard the health of their citizens. However, do states need to double or triple their prices to send that message?

A Consumption Tax That Targets Unseemly Behavior

The sin tax is another name for a consumption tax, or a tax on goods and services. Unlike a single sales tax on goods or an additional fee for gasoline, however, this type of tax targets specific behaviors that society views as unsafe. What used to be a simple consumption fee on beer, wine, and liquor has grown to cover items that may not necessarily be considered a sin by every citizen.

Does your state have sin taxes besides those on alcohol and tobacco?

  • Alabama charges an additional 10-cent tax on packs of playing cards.
  • Arkansas tacks an additional 6 percent on tattoos and body piercings.
  • Minnesota imposes a 6.5 percent tax on any apparel made with animal fur.
  • The state of Utah is home to legal prostitution and a sex tax. Anyone who hires nude or partially nude individuals must deposit a 10 percent tax into the state’s coffers.

These are just some of the more unique sin taxes employed around the country, and as you can see, the scale tips widely.

Nevertheless, the more important question is whether these types of taxes work. Do they reduce consumption as well as bring in additional state revenue?

The numbers don’t lie: According to Bloomberg Business, the 12 states that raked in the most from sin tax revenue in 2012 ranged from $76 million in South Dakota to $2.4 billion in Texas!

However, while those revenues are impressive, states can only can jack up prices so much before their successes might work against them. New York City, for example, has the highest cigarette tax in the nation, at $4.35 per pack, plus an additional $1.50 per pack in New York City. Rather than bringing in increased revenue or forcing people to quit, it’s created a massive black market in which nearly 60 percent of sales are illegal.

When consumers go to the black market, legal businesses and state treasuries both lose that revenue. Businesses that lose out may head to another state, further reducing state revenue.