What Is a Sin Tax?
A sin tax describes a type of tax levied on a good, service, or activity that is viewed as harmful to people’s health and well-being.
It can also be referred to as a public health tax because governments typically use the revenue generated from the sin tax to pay for costs associated with the treatment of issues that result from the use of a product or activity deemed harmful to people’s health or wellbeing.
As an excise tax, consumers pay sin tax when an item, such as a pack of cigarettes, is purchased at a sales counter. Sin tax rates can range from a little to a lot, but they tend to be higher than those on products or businesses for which a sin tax doesn’t apply.
What Is the Purpose of a Sin Tax?
A sin tax is intended to reduce consumer use of a particular product or activity. Public health officials worry about the harmful impact of alcohol, for example, on people’s lives. Too much drinking can lead to a host of physical and mental ailments, such as addiction, liver damage, and impairment. Driving under the influence can lead to vehicular accidents and loss of life. Treatment for illnesses due to alcoholism for millions of Americans can cost billions of dollars annually.
How Is a Sin Tax Levied?
Legislature at the state level typically sets the law, and the state government implements the sin tax. But a sin tax can also be administered at the federal level, and, depending on the type of product, sometimes by counties and cities.
A Brief History of Sin Tax
In the U.S., the concept of sin tax traces its roots to 17th-century Massachusetts, which levied an ad valorem tax—tax based on fractional wholesale or retail price—on imported goods such as sugar, wine, liquor, and tobacco. Indirect taxes focused on "sinful" activities such as drinking and smoking, though such duties weren’t severe.
The first American sin tax came in the form of an excise tax known as the whiskey tax in 1791. Its main purpose was to generate much-needed revenue for the new republic after the Revolutionary War, but it faced resistance from farmers who were veterans.
Some proponents had hoped that as a sin tax, it would discourage the drinking of spirits and other distilled alcoholic drinks. The whiskey tax was repealed more than a decade later, and taxes on distilled spirits wouldn’t appear again until the 1860s to finance the costs of fighting during the Civil War.
In 1921, Iowa was the first state to levy a tax on cigarettes to generate revenue. Over the years, tax on tobacco products came to be viewed as a way to discourage tobacco use by the public due to health issues.
By the latter half of the 20th century, other types of sin tax emerged, notably on gambling.
Examples of Sin Tax
There are many different types of sin taxes, but most target one of the following product categories.
Tobacco
Tax on tobacco products is levied as a unit tax (a tax based on sale per unit) and ad valorem tax at the federal, state, and local government levels. Taxes on cigarettes, cigars, and chewing tobacco are viewed as justifiable because of tobacco use’s impact on the public health of Americans.
Smoking costs hundreds of billions of dollars in direct medical expenses and lost productivity each year according to the Centers for Disease Control and Prevention.
Alcohol
Tax on alcoholic beverages is typically viewed as a deterrent to drinking. Excessive alcohol drinking is tied to thousands of deaths each year and shortened life expectancies for many Americans. Health risks range from injuries sustained in vehicular accidents and domestic violence to alcohol poisoning and heart ailments.
Duties on alcoholic beverages can be levied first at the wholesale level\ and then onto consumers as a supplementary retail sales tax.
Gambling
Tax on gambling is typically focused on casinos, but it may also apply to other forms of gaming, such as bingo facilities and racinos (racetrack casinos). Taxes on gambling, though, don’t apply on Native American land. Tax on gambling was originally introduced in the 1950s as a way to prosecute illegal bookmaking operations for tax evasion.
Gambling is generally viewed as potentially addictive, and compulsive gambling can lead to personal financial ruin and a breakdown in mental health.
Soda
There are no federal or state taxes on sugary, sweetened, non-alcoholic beverages, but some cities—including San Francisco and Philadelphia—levy per-ounce taxes on drinks sweetened by sugar. Supporters of soda taxes believe that such tariffs could curb sugar consumption and reduce obesity rates.
Other Taxes
Pornography, cannabis (medicinal and recreational use), e-cigarettes, and sports betting are among areas either being taxed or up for consideration.
How Do Sin Taxes Differ From Blue Laws?
Blue laws get their name from the color of the paper on which the laws were written during the 17th century in colonial New England. At the time, Puritans had strict rules about work on Sundays, and that carried over to states banning sales of alcoholic beverages on Sundays. While a sin tax levies a tariff on a particular product or activity, a blue law bans the sale of a product or activity outright.
Which States Benefit the Most From Sin Taxation?
Tax revenue from alcohol and tobacco can be significant but can vary substantially by state. New York and Connecticut charge a sin tax of more than $4 per pack of cigarettes, while Missouri and North Dakota have a tax of less than 50 cents a pack.
