On Monday, the state of New York once again raised its cigarette tax. The average price of a pack of cigarettes in New York City, which imposes its own cigarette taxes, will shortly rise to almost $11. Many other states have also turned to so-called sin taxes on gambling, alcohol, sugary drinks and fast-foods to fill their depleted revenue coffers. There is even talk of drug legalization in order to create another potentially large tax base.
On June 1, the Tax Foundation observed that after the District of Columbia raised its cigarette tax from $2 to $2.50, revenue from the tax fell 24%. It had projected a revenue increase of almost $10 million, but revenues actually fell by $5 million over the previous year. (Note: the tax rate in nearby Maryland is $2/pack and just 30 cents/pack in Virginia.)
On May 17, the Joint Committee on Taxation issued a report on the taxation of gambling in the United States in conjunction with a May 19 hearing before the House Ways and Means Committee on Internet gambling.
In a May 7 paper, Ryan Vinelli of the Cardozo School of Law argues that taxes on sugary drinks do not qualify as “Pigouvian” (offsetting a social cost) because they are too narrowly-based, too small to effectively deter consumption, and regressive on the poor.
An April 10 report from the Centers for Disease Control and Prevention criticized states for raising their cigarette taxes without channeling more of the additional funds into tobacco cessation programs.
According to a February 4 Treasury Department report and May 27 testimony before the House Ways and Means Committee, tobacco tax increases in recent years have led to a sharp increase in smuggling and tax evasion.
In a February 2010 study, Harvard economist Jeffrey Miron estimated that drug legalization would yield more than $34 billion in annual revenue to the states. In addition, they would save $33 billion in enforcement costs.
In the December 2009 issue of the National Tax Journal, economists Andrew Hanson and Ryan Sullivan examine the 2008 increase in the tax on tobacco in Wisconsin. They find that tobacco companies and retailers piggy-backed on the tax increase to raise prices by 8 cents to 15 cents more per pack than the tax.
Also, a December 2009 paper by economists Austan Goolsbee, Michael Lovenheim and Joel Slemrod looked at cigarette sales over the Internet and found that they have greatly lowered the revenue-generating potential from state cigarette tax increases.
In the Winter 2009 issue of the Boston College Third World Law Review, Rachel Morse criticized sin taxes as unjustified social engineering which tend to have a disproportionate impact on minorities and the poor.
An October 2009 study by RAND examined the ban on fast-food restaurants in South Los Angeles that was designed to reduce obesity and found that it was totally ineffective.
In a July 2009 study, Mercatus Center economists Richard Williams and Katelyn Christ condemned sin taxes on the grounds that they contradict free choice and seldom do much to suppress the alleged sinful behavior.
Bruce Bartlett is an American historian and columnist who focuses on the intersection between politics and economics. He has written for Forbes Magazine and Creators Syndicate, and his work is informed by many years in government, including as a senior policy analyst in the Reagan White House. He is the author of seven books including the New York Times best-seller, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (Doubleday, 2006)
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