Alexander Hamilton is called the “father of sin taxes” in the United States, and rightly so. In an effort to raise money to repay Revolutionary War debts, he persuaded Congress to impose the nation’s first excise tax, on whiskey. Hamilton thought whiskey a commodity that was ripe for taxation, believing it to be a luxury rather than a necessity of life. Whiskey was cheap, he said, and as a result it encouraged citizens to overimbibe, thus creating a hazard to the morals of the nation. Although arguably sensible, I can’t help but wonder if Hamilton had a personal motive — even if tiny — for pushing a whiskey tax. It was well known in the social circles in which he traveled that Hamilton couldn’t hold his liquor. John Adams, who was no fan of Hamilton, called him “an insolent coxcomb who rarely dined in good company where there was good wine without getting silly and vaporing about his administration, like a young girl about her brilliants and trinkets.”
Sin taxes are a means of regulating consumer behavior the government deems contrary to the public good. According to professor Peter Lorenzi at Loyola College in Baltimore, sin taxes exhibit three characteristics: (1) the behavior is addictive and thus has an inelastic demand curve; (2) the taxed behavior is self-destructive; and (3) the behavior has negative externalities — that is, other people suffer. Cigarettes are a common example. Nicotine is addictive; tax increases may prompt some smokers to quit, but others simply switch to longer cigarettes, which are higher in tar and nicotine. Smoking is self-destructive, as it is directly linked to illnesses such as cancer and heart disease. And smoking has negative effects on others, such as nonsmokers who are exposed to secondhand smoke, which has been shown to cause the same illnesses. These illnesses place a high financial burden on Medicaid, Medicare, and public hospitals — all funded by tax dollars. Of course, “sinful” behavior is not limited to cigarette smoking. Alcohol consumption, gambling, and sugar consumption have been characterized as sinful behaviors. In short, behaviors that are considered “sins” are those that, either in excess or over the long term, are harmful to the individual as well as society at large.
Taxing behaviors such as cigarette smoking, alcohol consumption, and gambling are policy compromises. The government could ban the activities, but as a policy tool, that sometimes doesn’t work — people find ways to obtain what they want, which can have unintended consequences, such as creating a lucrative black market. Policy compromises are a better route than an outright ban, a lesson the federal government learned the hard way during the Prohibition era. However, when excise tax rates get too high, it starts to resemble prohibition, and consumers react accordingly. The combined New York state and city taxes push the cost for a pack of 20 cigarettes to $14. Nevertheless, smokers — especially low-income smokers — find ways to feed their habit. Local stores sell “loosies,” or single cigarettes, which is illegal under federal and New York law. Yet cigarette bootlegging has become highly profitable. There are estimates that almost 60 percent of cigarettes smoked in New York are bootlegged. Busts of cigarette bootlegging rings make headlines, and they often involve millions of dollars.
So what are we to make of sin taxes? Do they work? Do we need a paternalistic government regulating our private behavior? I’m not sure I have an answer, but I’m reminded of something former President Ronald Reagan said, and I’m paraphrasing: Government exists to protect us from each other, not to protect us from ourselves.