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Taxing Sins

  • Jul 25, 2013 | Gail Cole

 Sin taxes = tax revenue.

Sin: “An immoral act considered to be a transgression against divine law.”

Sin tax: “A tax on items considered undesirable or harmful, such as alcohol or tobacco.”

Why do federal and state governments tax sins? Is it because sins are inherently bad (see above definitions) and lawmakers feel the need to protect us from them? Is it because lawmakers know people will always sin, and therefore sin taxes are a surefire source of revenue? Do sin taxes protect us from ourselves, or exploit our weaknesses, or both?

Motivation aside, so-called sin taxes do have a habit of raising revenue and curbing behavior with expensive side effects (like smoking), and that's a habit states want to encourage. According to an article published in the journal Mayo Clinic Proceedings, taxes on the “four sins” (alcohol, fatty foods, sugary beverages and tobacco) are a good thing. Authors Michael J. Joyner and David O. Warner (both MDs) argue that such Pigouvian taxes improve the overall health of the nation by discouraging consumption of the taxed products. If the four sins were taxed as proposed in the article, they would also raise much needed revenue--approximately “$600 billion or more of increased revenue over 10 years.”

Many states already tax sins more heavily than other items. Read on for for a sample of how states tax sins:

Alcohol Tax

  • Rhode Island is experimenting with a 16-month sales tax exemption for sales of wine and spirits.
  • Minnesota businesses that don’t pay taxes to the state don’t get to sell liquor.
  • New Hampshire lawmakers tried to increase the tax on beer, but the legislation was killed in the Live Free or Die state.
  • New Orleans rakes in tax revenue during Mardi Gras, when alcohol consumption matches revelers’ enthusiasm and sales of alcohol typically increase by 30%.
  • Drinkers in New York City are hit by both the state excise tax on sales of beer, wine and liquor and the city tax on sales of beer and liquor containing more than 24% alcohol per volume. If you don't want to pay those taxes, get a job with the government. Government officials in New York and the foreign dignitaries at the United Nations: alcohol purchased for their use is tax free.
  • Although New York taxes drinkers, it eases tax filing requirements for farm wineries and distilleries and farm breweries.
  • In Washington State, where since June 2012 state liquor stores have been replaced by private stores (and grocery stores and drug stores), the tax rate has remained the same but fees paid by private retailers have increased. The Tax Foundation notes that Washington State already had the highest excise tax rate on alcohol in the country. When the state ran the show, the total mark-up was 51.9%. Now it runs between 52% and 72%. The result? The cost of consumption has increased.  By comparison, California seems to encourage drinking with its relatively low taxes on alcohol. This may be one reason Washingtonians travel south so frequently; it’s not the grey or the rain after all.

Cigarette Tax

One of President Obama’s first actions was to increase the federal tobacco tax by 62 cents. Just over three years later, the tax increase had raised approximately $30 billion in additional revenue and reduced the number of smokers by approximately 3 million.

Cigarette taxes are strongly supported by some—notably folks in the public health industry--and they are strongly opposed by others—particularly lawmakers from states where tobacco is grown. Controversial though they may be, numerous states have increased or are about to increase cigarette and tobacco taxes. These include:

  • Colorado, which permanently eliminated its cigarette tax exemption, effective July 1, 2013;
  • Maryland, where lawmakers proposed a cigarette tax increase last fall. The legislation hasn’t gained any traction.
  • Minnesota, which raised cigarette and tobacco taxes on July 1, 2013.
  • New Hampshire, where tobacco taxes will increase significantly on August 1, 2013.
  • Texas is increasing the tax rates for tobacco products other than cigars. In FY 2010, the tax rate per ounce was $1.10. In FY 2013 it is $1.19, and in FY 2014 (which takes effect on September 1, 2013), the rate per ounce will be $1.22.

Soda Tax

Soda taxes have gained popularity in the United States, as Americans grow wider and lawmakers seek to stop the spread of obesity.

  • More than one city in California proposed imposing sales tax on soda in 2012, but voters rejected the idea.
  • New York City, the hero of anti-sinners everywhere, skipped the sin tax and went straight to a ban of sodas in greater than 16-ounce servings.

In fact, many states tax sodas and sugary drinks at a higher rate than, say, milk. Washington State and Streamlined Sales Tax states subject soda to sales tax but exempt beverages containing milk or more than 50% vegetable or fruit juice (by volume).

Fatty Foods

Americans are not a slender people, and the side effects of obesity (diabetes, heart disease, etc.) are costing society. Some think that taxes can help encourage Americans to hit the gym. Taxing obese people themselves has been proposed, as has taxing the foods that help make them obese.

  • Texas will exempt sales of certain “healthy” snacks, beginning September 1, 2013. While popcorn, chips, crackers and hard pretzels may not be considered healthy, they are considered less unhealthy than candy.
  • Nevada lawmakers proposed a 5-cent tax on high caloric fast food, but the legislation died.

Even Europeans, who are generally more slender than their American counterparts, have considered taxing fatty foods to discourage their over-consumption. Denmark levied a “fat tax” in 2011 (causing a run on butter). The tax was rescinded a year later because of its unpopularity. And France, home to buttery croissants and sinfully fatty foie gras, has considered increasing the taxes on “unhealthy food” more than once. Such a tax may or may not dissuade consumption of fatty foods, but it would raise revenue needed for the state health care system.

This is all very interesting. Yet an article in the Huffington Post points out that while “sin taxes” on tobacco have reduced the number of smokers, curbing the unhealthy eating habits of Americans through taxes “will be more difficult….” After all, a trip down the produce aisle has a greater impact on wallets than a trip down the chip aisle.

A Few Additional Sins

The Mayo Clinic article lists the big four sins as alcohol, cigarettes, soda and fatty foods. But why stop there?

Gun and Ammunition Taxes

Increasing taxes on guns and ammunition has been considered by more than one community:

  • Cook County, Illinois, home to Chicago, now subjects sales of new firearms to a $25 tax.
  • California has considered taxing bullets, but the legislation got stuck in Committee.
  • Nevada lawmakers proposed a tax on ammunition, but it died in committee.

On the flip side: Texas lawmakers have proposed a sales tax holiday for firearms and hunting supplies (it died); Louisiana has a “Second Amendment Sales Tax Holiday.

Violent Video Game Tax

A tax on violent video games has surfaced recently.

  • Missouri Representative Diane Franklin proposed imposing a 1% tax on violent video games earlier this year.
  • Lawmakers in Oklahoma and New Mexico have tried to do the same, but no state has yet succeeded.

Marijuana Tax

Many have long considered marijuana consumption to be a sin, but the taxation of marijuana is a relatively new thing. Colorado and Washington State will soon tax retail sales of recreational marijuana. Several other states impose tax on sales of medical marijuana. Indeed, one of the arguments used by proponents of legalization is the fact that sales of marijuana will generate a lot of tax revenue.

Lap Dancing

Lap dancing is subject to sales tax in New York. Charges for admission to dramatic arts and musical performances, however, are exempt.

The Moral of this Tale

Like all taxes, sin taxes raise revenue.

How does your business manage sales tax—on items both sinful and saintly?

photo credit: Alexandra Nicole Photography via photopin cc

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.