The Wages of Sin in Public Finance

The Wages of Sin in Public Finance

My students and I had a good laugh a couple of weeks ago.

They were looking at the relationship between the tax rate on cigarettes and the consumption of cigarettes per capita across the 50 states of the U.S. The alternative views they were considering were that demand for cigarettes is relatively elastic (meaning that the demand for cigarettes varies with conditions and is subject to influence through policies like taxes), or that demand for cigarettes is relatively inelastic (meaning that such policies have no effect). The statistical evidence, comparing states with different cigarette tax rates, was quite clear: the higher the tax rate, the lower the consumption of cigarettes per capita.

Of course, this wasn’t a causal analysis. Indeed, there weren’t any controls of any kind introduced. But the pattern made clear that at least something was going on that caused tax rates and consumption to vary inversely.

I summarized their findings by making reference to “sin taxes” . . . and my students laughed.

Sin taxes”?

Elected officials and public policy professionals know the concept well. A good recent example: The State of Colorado reaped roughly $2 million in revenue in the month of January from the taxes and fees associated with recreational marijuana, a figure driven by “a 15% excise tax, a 10% special sales tax and a 2.9% sales tax on recreational marijuana, in addition to application and license fees,” according to CNN Money. A nearly 30% tax rate on a basic commodity that might be used by anyone.

For the sake of comparison, it appears that the average county tax rate on residential properties in Colorado amounts to 0.6%.

Of course, the total value of property in Colorado is much greater than the total value of pot (at least I hope it is), so a much smaller tax rate produces a considerable amount of revenue. Still, rates matter, and when a rate is not attached to ability to pay (the principle of progressive taxation), such a high rate begs the question, “Why”?

Except that we know the reason why.

“Recreational” marijuana consumption may be legal in Colorado, but that doesn’t mean that the state’s leaders (or the public generally) considers it desirable. Indeed, if a high level of consumption can be discouraged, that’s probably a good thing.

In like manner, many states tax tobacco products, alcohol (especially liquor) and gambling. Many states have decided that people are going to smoke or chew, drink and throw their money away on games of chance; preventing them from doing so is impractical. Instead of bans, then, states opt for licensing, regulation and heavy taxation.

Such are the wages of sin.

Next: Connecting Sin to Service