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Do sin taxes work? Slapping new taxes on tobacco, alcohol, and soda is a good way for states to raise money. But does it change behavior?



You might soon be paying more for your Pepsi or Sprite. That's because two very different groups, for very different reasons, are pushing for soda taxes. Public health advocates, concerned about the impact of sugary drinks on the nation's obesity problem, want soda to be more expensive so you'll buy less of it.

And states, trying to close gaps in their budgets, are looking at all kinds of taxes, including "sin taxes"--taxes intended to discourage undesirable behaviors. Politicians have always liked sin taxes because, at least in theory, they not only raise money but also do a social good.

Since January 2009, 23 states have increased their tobacco taxes. Seven states last year either enacted new taxes on alcohol or raised existing ones. And 25 states have legalized new forms of gambling or considered doing so to increase tax revenues.

As for your soda, the District of Columbia in May approved a tax on soda and other drinks with added sugar. Colorado and Washington State approved taxes on soda and candy. Soda tax increases were also proposed in New York and Massachusetts but did not pass.

One reason politicians turn to sin taxes is that they often face less public opposition than other kinds of taxes.

"It is more politically attractive to tax these kinds of things" says Peter L. Faber, a tax lawyer in New York. "No one can get mad at you for taxing people who drink too much"

This isn't the first time lawmakers have turned to sin taxes during hard times to raise money. Many historians say the desire to boost tax revenue during the Great Depression through a tax on alcohol was part of the motivation in 1933 for repealing the 18th Amendment, which had established Prohibition in 1919 (see photo, above left).

Getting Creative

With the nation still trying to dig out from the depths of the worst economic slide since the Depression, some states are getting creative in their search for new revenue streams.

In Nevada, lawmakers have discussed expanding, and taxing, legalized prostitution. Texas, Georgia, and Pennsylvania have considered taxes for buyers of pornography and patrons of strip clubs and escort services. In California, advocates of marijuana legalization are pointing to the tax revenue that it would generate.

Economists doubt that sin taxes greatly affect the behavior of most Americans, especially when the amounts tacked on are quite small (as they usually are). However, one of the lessons of the recent rise in cigarette taxes is that big price changes can lead to big behavior changes, even with an addictive product like tobacco. (This could be relevant in the soda-tax debate since teenagers--the biggest soda drinkers of all--are especially price sensitive.)



But, ironically, from an economic point of view, sin taxes that really succeeded in changing behavior would be self-defeating.

"On some level, politicians want these taxes to affect behavior," says Kim Rueben, who studies state and local taxes for the Urban Institute. "But they're kind of in trouble if it works too well. If it's actually effective in changing behavior, governments lose that revenue source?'

Even if governments are more concerned with balancing their budgets than with our health, sin taxes do have social value, economists say.

Costs of Obesity

The argument for a soda tax or a "fat tax" on junk food is the same as the argument for a tax on tobacco or a tax on gasoline as a way to break our addiction to oil and tackle global warming: When an activity imposes costs on society, economists say that the activity should be taxed. Doing so accomplishes two goals: It discourages the activity by making it more expensive, and it raises money to help pay society's costs.

In the case of soda and junk food, those costs come in the form of medical bills for diabetes, heart disease, and other side effects of obesity. We're all paying these bills, via Medicare, Medicaid, and private insurance premiums. Indirectly at least, obesity has become one of the causes of the federal government's swelling long-term budget deficit.

Harvard University economist Gregory Mankiw concedes that a significant soda tax might encourage better nutrition and be good for us in the long run, but he still has concerns.

"Even as adults, we sometimes wish for parents to be looking over our shoulders and guiding us to the right decisions," Mankiw wrote recently. "The question is, do you trust the government enough to appoint it your guardian?".

Catherine Rampell is an economic editor at The New York Times.
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Title Annotation:NATIONAL
Author:Rampell, Catherine
Publication:New York Times Upfront
Geographic Code:1USA
Date:Sep 6, 2010
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