Thou Shalt Not Sin?

5/16/2012

It’s no secret that Washington uses the tax code to do more than just raise revenue. Lawmakers also use it to influence some of our biggest financial decisions, with tax deductions for mortgage interest to encourage homeownership, tax credits for fuel–efficient cars to encourage conservation, and “bonus depreciation” to stimulate business spending.  

The government also uses the tax code to sway some of our smaller decisions too. This is especially true with so–called “sin taxes” – essentially, fees we pay to consume unhealthy products or engage in unhealthy behaviors. As Adam Smith wrote in The Wealth of Nations, “Sugar, rum and tobacco are commodities which are nowhere necessaries of life, which become objects of universal consumption, and which are therefore extremely proper subjects of taxation.”  

230 years later, sugar, rum, and tobacco are still taxed. And how effective are these taxes at achieving their dual goals of raising revenue and discouraging unhealthy behavior? Well, they do raise revenue – federal and state tobacco taxes alone raise nearly $30 billion per year. But some economists find that sin taxes send the wrong message by legitimizing the behavior they are trying to discourage. Here’s what Harvard Professor Michael J. Sandel says in his new book, What Money Can’t Buy: The Moral Limits of Markets: “A study of some child–care centers in Israel shows how this can happen. The centers faced a familiar problem: parents came late to pick up their children. A teacher had to stay with the children until the tardy parents arrived. To solve this problem, the centers imposed a fine for late pickups. What do you suppose happened? Late pickups actually increased.”

Clearly, telling parents “don’t be late or we’ll fine you” sends a very different message than telling them simply “don’t be late.” And so it goes with sin taxes. Telling smokers and drinkers “don’t indulge or we’ll tax you” offers them implicit forgiveness – that it’s actually okay so long as they pay the fee. It may sound hypocritical for Uncle Sam to wag his finger at you with one hand while he reaches into your pocket with the other, but sin taxes have been around a lot longer than income taxes, and they aren’t going away.  

While there’s really no planning we can help you do to avoid sin taxes, we do encourage you to question any tax you pay and seek to understand why you pay it. Understanding why you pay a tax can make you a better–informed consumer and will help all your dollars go further.