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If the Government Is Profiting off Your Bad Habit, Thank Sin Taxes

If the Government Is Profiting off Your Bad Habit, Thank Sin Taxes

Angela Colley

 Image via April @ Flickr

Image via April @ Flickr

Here’s a fun riddle for you on Tax Day: What do plastic bags and lap dances have in common? Depending on where you live, they could both be taxable. It all comes down to the “sin” tax, an excise tax meant to discourage a particular vice—smoking, drinking, lusting, gambling, etc.—and kick a little revenue to the state, county, or city, to boot.

Though Americans have doubted their habit-breaking effectiveness—and sometimes outright refused to pay them—sin taxes helped fill our country’s coffers at critical times. And while our bad habits may have evolved, the government efforts to extract easy money from the vices of the day are only growing in popularity.

The tax man cometh

Sin taxes aren’t new. In 1791, a mere 15 years after the United States was founded, George Washington imposed a tax on domestically made alcohol to help generate revenue for Revolutionary War debt. It was our first official sin tax—and soon after, led to our nation's first farmer riot.

As you may remember from history class, farmers, particularly in western Pennsylvania, had been using their surplus grains to make alcohol to be sold or bartered. When the “whiskey tax” came into effect, their tax-free moonshine currency suddenly became taxable income. Since many of those farmers-turned-distillers had just fought a war over that whole “taxation without representation” thing (inspired in part by an excise tax on tea imposed by the British), everyone took it really well. Protests erupted into violence, pitchforks were brought (we’re assuming), and at one point, a 500-man mob attacked the home of tax inspector General John Neville.

In the end, President Washington, like he do, led a 13,000-deep army into western Pennsylvania. The farmers packed up their pitchforks and went home before Washington even showed up, the Whiskey Rebellion went down in history, and sin taxes were here to stay. 

The federal government imposed a similar excise tax on booze again a few times, like during the Civil War to help fund the Union Army. Today, sin tax is mainly sold as a way to help offset the cost of our vices on public health by boosting state and local revenue.

The big four

In fiscal year 2014 alone, state sin tax collection topped $32 billion, according to Governing magazine, with that revenue largely coming from taxes on “the big four” vices.

Alcohol: While Tax Day might drive you to the bottle, you won’t escape taxes there, oh the irony. Alaska residents face the highest rates, paying $12.80 in taxes for every gallon of liquor produced with more than 21 percent alcohol by volume. But what Alaska has in cost per unit, Texas more than makes up for in volume. In 2014, Texas was the only state to rake in more than $1 billion in alcohol-related sin tax revenue, according to MarketWatch.

Smoking: Smoking is inarguably bad for you, but how much you’ll pay for the habit varies by state. New York is the highest with a $4.35 state tax per pack. If you live in New York City, you’ll pay an extra $1.50, bringing the tax total up to $5.85. Perhaps unsurprisingly, the states that grow tobacco charge the least tax on those products. Kentucky imposes a whopping 60 cents per pack tax, but legislators are currently debating bringing that up to $1.10.

Gambling: From riverboat casinos to betting on the ponies, many states have found ways to profit off Lady Luck. In fiscal year 2014, Rhode Island generated 15.9 percent of its tax revenue through sin tax, largely due to collections from casinos. For example, one casino paid the state 61 percent of earnings from video lottery machines, according to Governing. Predictably, Sin City itself also raked in some serious cash from gambling revenues, with 13 percent of Nevada’s total tax coming from casinos.

Sex: Sex may sell in marketing, but it also pays in sin tax. Many states impose sin tax on pornography and exotic dance clubs. States like Texas impose a $5 tax at the door (dubbed the “pole tax”) on strip club patrons. And in Utah, on top of a 10 percent tax on any striptease-related action, there’s also a matching tax for any food, beverage, or merchandise sold inside a strip club. 

Then they came for the sodas

As times and vices have changed, some states and local municipalities have found new and exciting ways to part you from your money.

Sugary drinks: Several cities have passed or are debating legislation that taxes sugary drinks, mainly citing their role in the rise of obesity. But efforts to curb the consumption of sodas, sports drinks, and the like are not always welcome by citizens or retailers. When Seattle added a $1.75-per-ounce tax to such beverages, Costco responded by putting up signs near impacted merchandise that broke down the new cost. For example, according to MarketWatch, a case of Dr. Pepper increased from $9.99 to $17.55—a 76 percent surcharge. The signs encouraged soda-swilling customers to purchase the beverages from Costco locations outside of the city limits.

Candy: Some states are also adopting a tax on another sugar culprit: candy. But apparently the definition of candy is pretty complex. In Illinois, to be considered taxable candy, a product must be made without flour, meaning Snickers count, but Twix bars don’t.

Marijuana: While many states have legalized marijuana, as the saying goes, “Nobody rides for free.” The states that have legalized recreational marijuana have done so with steep, and lucrative, taxes. Washington, for example, has a 37 percent excise tax on marijuana sales, according to the Tax Foundation. And those tax earnings can be a game changer. Between January 2014, when Colorado first legalized recreational marijuana use, and May 2017, the state brought in $500 million in revenue from cannabis alone, according to VS Strategies, a pro-legalization research firm in Denver. More than half of the funds went to public education.

Despite their continued use, sin taxes have been debated for years. Many experts feel the taxes are regressive, disproportionately burdening lower-income people. And there is some debate as to how effective a sin tax is at getting you to kick the habit, whatever it may be. But one thing’s for certain—sin taxes are profitable for local governments, which means your vices won’t get cheaper anytime soon.

 

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