Some Thoughts on Sin Taxes

Since tax day just passed, I’ve been thinking a lot about the tax codes and why they’re written the way the are. Sexy topic, I know, but as a small business owner and all-around decent citizen, taxes are both painful and necessary. Any time a new tax idea is introduced, I’m interested, because it affects me.

I’m not going to address the politics behind tax policy. We all know that if a politician proposes a tax on, say, new cars, then the automobile industry will lobby hard to block that tax. Politicians are paid off, corporations make deals and donations, etc. But that’s all (sadly) behind the scenes.

The part that is front and center is when a politician proposes a new tax so that those tax monies can be used for a new and important social program. And to make this tax more appealing to voters, said politician decides to target “sin” products, those things that are bad for us but make us feel oh so good, like alcohol, cigarettes, soda, or fast food. I mean, we don’t want people being unhealthy, do we? So hey, let’s add a dollar to every purchase of a soda, and that dollar can pay for universal preschool! Win, win!

But let’s think this through:

1. The goal of the tax is to pay for a program that low- and middle-income families cannot afford on their own. (Because, of course, high income people can pay for their own preschool, and won’t qualify for the program.)

2. Who are the major buyers of “sin” products? Multiple studies say it is low-income people.

3. If #2 is true, then…low-income people will actually be paying for their own program!

Defies logic, doesn’t it?

Another point:

1. A “sin” tax has the added benefit of encouraging people to be healthier. The higher price should be a deterrent to purchasing those taxed products.

2. Studies demonstrate that this is the case, at a certain price point. Let’s assume the tax has pushed the price high enough.

3. So what do people do when they can no longer afford their sin of choice? They look for an alternative. If they cannot afford a soda but want a sugar boost, they turn to a Snickers bar. If they can’t afford the Cafe Mocha, they will buy a black cup of coffee and dump three packets of sugar in it. Or a black market will develop for the sin item. You’re not actually saving anyone’s health with this approach.

4. But it has been demonstrated that people will turn to healthier alternatives if they’re available and the right price. Taking up vaping in favor of smoking is one such example. But this switch was due to the free market, where an entrepreneur brought vaping to the market and showed it to be a viable (and healthier) alternative to smoking. If vaping hadn’t been available (studies show), those people would most likely still be smoking cigarettes.

And another.

1. If you want to pay for a program that helps those will lower incomes, you need those with higher incomes to pay for it.

2. Again…sin products are disproportionately used by lower income people. Taxing these products will hit these people the hardest. These taxes are regressive, meaning they are the same for everyone, no matter their income, so that means they are “higher” for low income people, because they count for a greater percentage of their income. If you make $1 and I make $10, and we both pay $1 in tax on our soda, you’re paying 100% of your income, and I’m only paying 10% of mine.

3. If the goal is to get high-income people to pay for these programs, it makes more sense to target luxury products for these taxes.

And let’s not forget the inherent dictator-ness of these taxes. You’re telling me what to eat and what to drink and what to smoke. I’m in charge of my own health, thanks.

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