Huntsman Alumni Magazine Spring 2013

Spring 2013

Research on “Sin Taxes” Finds Costs Often Outweigh Benefits

William F. Shughart, II, and Michael D. Thomas, two economics professors at the Huntsman School, partnered recently with economist Adam J. Hoffer from the University of Wisconsin-La Crosse on a working paper on “sin taxes.” The paper was published in February by the Mercatus Center at George Mason University. The authors make the case that the costs of “sin taxes” often outweigh the benefits. So-called “sin taxes” are applied to a variety of things, such as alcohol, tobacco, gambling, and more recently, soda. The paper garnered wide media coverage, in U.S. News & World Report, Atlantic Business, Forbes, Newsweek, and more.

The public debate, particularly on the costs and benefits of a tax on sugary soda, has been extensive. Drs. Hoffer, Shughart, and Thomas explained in their recent paper that state and local governments are burdened by ever increasing spending obligations and by the political unpopularity of raising traditional taxes. To find needed revenue, state and federal governments have recently revived “an old but not necessarily good idea” of adopting “sin taxes” to refill their coffers.

The paper addresses the application of sin taxes to a whole range of new products, not just sugary soda. While the authors note that there is a connection between excessive consumption of soda and obesity, they suggest that taxes only work when behavior responds to the increased price. The paper offers three main reasons to reject the taxes.

1. SIN TAXES USUALLY FUND GENERAL BUDGET SHORTFALLS.

The taxes do not raise money that is especially targeted to address the effects of the disfavored good itself. The tax, instead, takes advantage of unpopular activities to raise revenue which would otherwise be politically difficult to do. This goes beyond simple paternalistic grandstanding into shifting monetary resources from politically unpopular groups in order to keep tax rates low for groups with a stronger political voice.

2. A REGRESSIVE TAX BURDEN FALLS MOST HEAVILY ON POOR PEOPLE.

“Like consumption taxes in general, the burden of sin taxes usually falls disproportionately on low-income households,” the authors write. As the U.S. News article states, “sinners are not very sensitive to increases in the prices of the sinful goods and services they buy. They reduce their purchases, of course, but not by much.”

3. TRIGGERS WASTEFUL SPENDING ON LOBBYING.

The expanding list of goods taxed in this way triggers socially wasteful lobbying by the affected producers. The beverage industry, for example, spent $57 million in 2009 alone, lobbying against the soda tax that New York Mayor Michael Bloomberg and Dr. Richard Daines advocated.