The wage—and revenue--of sin (taxes)

I could title this “From the folks who brought you alcohol prohibition….” That is, your guvvmint.

Friday’s (Sept. 7) Wall Street Journal had an interesting editorial regarding municipal and state taxes on cigarettes. Those that have them already, and base their budgets partly on that revenue, are seeing income that falls short of the budget projections. People aren’t polluting their lungs enough, and thus whatever programs for which the government uses the money go underfunded.

If people are kicking the habit that’s certainly good health news, but healthier citizens might not be the only cause for the missing tax dollars. As states or cities become pockets of land where it costs more for a puff, their police and elected officials are starting to see what happens any time something becomes either outlawed or cost-prohibitive—namely, boarder-hopping and bootlegging. Why pay all that tax in a store close to home when you can make a little trip to the next city or state where it’s cheaper and stock up there? Better yet, you can buy tax-free from a guy who’s already made such a run and is selling out of the trunk of his car. Easier still, buy online and avoid taxes that way, since states rarely check if you’ve paid tax on online purchases.

I’m no economist, and definitely not a rabid free-marketeer, but I do think there are limits on what government can and should impose when it comes to regulating goods and services. Human nature says that people are willing to pay to indulge a habit or vice, but there’s usually a limit to that willingness. If New York City is, as the editorial says, seeing the buying and selling of tobacco on the street just like illegal drugs, then it’s safe to say a tipping point has been reached.

Taxes have reached such a level that there is incentive to skirt around the law, turning normally law-abiding citizens into low-level criminals. Furthermore, despite rhetoric that cigarette taxes go to funding worthy causes such as health care for the uninsured, smokers are more inclined to rebel and somehow avoid the increased cost. They don’t buy the line that their smoking supports the general welfare of someone else. In addition, they don’t see why only they have to pay for it.

Nevertheless, sin-tax revenue still brings in plenty of money, but too often projected revenues of a new or increased tax ignore very simple economics: price something too high, and sales will fall. As with gasoline, consumers who can’t afford higher prices will look at ways to cut their consumption (or get it in illegal ways), and both profits and tax revenues fall accordingly. Governments that thought they had a goldmine in cigarette smokers—and that raised taxes with a subtext of “We’ll punish you for that filthy habit, ha ha!”—are left scrambling to cover revenue shortfalls.

Prohibition was sold as a way to clean up and moralize America, but instead it led to a sharp rise in organized crime. Today we have a government doublespeak of encouraging smoking cessation but counting on the sin tax money to keep rolling in, and now cigarettes are heading underground and off the books. It’s the same absurdity of legislating “morality,” but this time it’s the government trying to profit from it.

And really, can there be any good in a program for some citizens being dependent on the unhealthy habits of others? Seems to me there’s a karmic lesson in that!

Legislating Morality

To expand upon your point regarding the inherent problems with the legislation of morality, we can also look that the problems with prostitution and the "drug war."

Nevada, where prostitution is legal in much of the state, has the lowest incidence of AIDS among sex-workers in the nation. Prostitution is taxed and regulated providing a safe environment for the prostitutes and their clients, as well as a tax base large enough to eliminate the need for a state income tax.

The prohibition against alcohol led to a dramatic increase in organized crime and turned otherwise law-abiding citizens into petty criminals as they refused to give up their liquor and continued to seek it out through illegal means. Similarly, the illegality of drugs has created an increasingly violent criminal class. Making drugs legal would eliminate so much of the violence of the drug trade. It would also allow for the regulation and taxation of drugs (just like alcohol is today) drastically reducing injuries and deaths from bad or fake drugs as well as providing another source of government revenue.

Just as alcohol can be abused, drugs and the sex trade can be as well. The issues surrounding the abuse are much easier to deal with when they are legally out in the open rather than hidden behind the veil of criminality.