“Sin tax” 101

By Barbara Bent

Excise taxes are taxes on specific goods or activities, according to the Internal Revenue Service. “Sin taxes” are excise taxes on products that, from a religious standpoint, might be considered shameful. Alcohol, tobacco and gambling bear this tax burden. In 2014, sin tax revenue reached well over $32 billion in the U.S. Tobacco taxes raked in the largest numbers with nearly $17 billion while alcohol was approximately $6 billion.

Sin taxes are often imposed to raise revenue and perhaps reduce demand for a product. Often, revenue generated from these so-called sin taxes goes toward health costs and debts associated with the use of the products, according to a 2015 report by Richard Mattoon and Sarah Wetmore of the Federal Reserve Bank of Chicago and the Civic Federation.

Hiking  sin taxes is a quick and easy way to generate short-term revenue. Adam Hoffer, an assistant professor of economics at the University of Wisconsin, said in the report by the Chicago Federal Reserve that raising the tax on cigarettes had a slight impact on tobacco use. A ten percent increase in the tax caused only a three percent decrease in tobacco usage, he said. From 2000 to 2015, there were 111 increases in tobacco taxes in the United States, according to the report. There were only four decreases in the tax.

Harry Lea, a tobacco warehouseman in Danville, Va., knows the industry well after storing the product and distributing it to larger companies. He said large cigarette industries located in Virginia keep the tax low.

“I think it’s a political football,” said Lea.

He said that many large manufacturers help finance political campaigns with the hope of keeping legislators voting against a higher cigarette tax. In addition, sin taxes are regressive, meaning the burden falls the hardest on low-income people, according to the Chicago Federal Reserve report. Smokers often continue to buy the addictive products or services though the prices may be steep because of a high tax. However, studies show that higher cigarette taxes will inevitably improve public health. The lower-income population has to spend a higher percentage of their income on the product than rich people do.

Raising the tax has its challenges as well. It can lead to two outcomes, one positive for public health and one negative for accumulating revenue, according to Virginia State Sen. Creigh Deeds.

However, if demand drops for the product because of the higher tax, then the government will make less money from the tax.

“You want to reduce the number of people using tobacco because you understand that tobacco has a detrimental impact on your health,” said Deeds, whose district includes Rockbridge County. “But you if want to increase revenue by raising the tax, at the end of the day if you reduce the number of people that use tobacco, you don’t really raise that much money.”