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December 8, 2014
Taxing the Sins of the Poor: Do Two Wrongs Make a Right?
by Martin A. Sullivan

Full Text Published by Tax Analysts®

This article first appeared in the March 20, 2000 edition of Tax Notes.

Please note that the article has been reproduced without the charts.


[1] In economics school two decades ago, I was taught that the federal excise tax on cigarettes is a "sin tax." Now that I think about it, that was not really much of an explanation. The septuagenarian instructor provided no economic justification for taxing sins. Nor did he offer any definition of sin. At the time, all of us in the class knowingly nodded our heads at the notion of sin and the need to tax it. It was not a very scientific idea, but it appealed to our baser instincts.

[2] The federal tobacco tax puts about $6 billion annually into the U.S. Treasury. (See Figure 1 on p. 1776.) A new generation of economists has rationalized it as an incentive for individuals -- particularly teenagers -- to reduce smoking, as a funding mechanism for the extra Medicare and Medicaid expenses that result from smoking, and even as a tax on the "externality" of second-hand smoke.

[3] But taxation is more about politics than economics. And politics is more about psychology than logic. As nebulous as it may be, I like the old-fashioned "sin tax" explanation of the tobacco tax more than the modern version. To me, it gets closer to the heart of the matter.

A Time-Honored Tradition

[4] Russian czar Peter the Great (1672-1725) is a great example of a leader who recognized the political benefits of taxing sin.

[5] From the dawn of Christendom through the Middle Ages, the Catholic Church -- taking its cue from St. Paul who said, "long hair was a shame unto a man" -- and many civil governments had tried to ban the practice of men growing facial hair. Peter realized the wicked vice of wearing a beard could be turned into fiscal virtue:

By this time fashion had condemned the beard in every other
country in Europe, and with a voice more potent than popes or
emperors, had banished it from civilized society. But this only
made the Russians cling more fondly to their ancient ornament,
as a mark to distinguish them from foreigners, whom they hated.
Peter, however, resolved that they should be shaven....Wiser,
too, than the popes and bishops of a former age, he did not
threaten them with eternal damnation, but made them pay in hard
cash the penalty of their disobedience. For many years, a very
considerable revenue was collected from this source....Those who
were refractory, and refused to pay the tax, were thrown into
prison.

-- Charles Mackay, Extraordinary Popular
Delusions and the Madness of Crowds
(1852)

[6] In the twentieth century, male facial hair is not a sin. Smoking, on the other hand, has become the sin of our modern secular times. According to government statistics, 46 million Americans smoke cigarettes. Most people -- including smokers themselves -- recognize the evils of smoking.

[7] And I, like most people, consider smoking foolish and dangerous. Still, there is something that rubs me the wrong way about taxing tobacco.

[8] Government statistics show that in general, smokers are less educated and poorer than the population as a whole. And because they smoke, they are likely to live less healthy and shorter lives than the general population. It seems to me that taxing smokers is kicking people who are already down.

[9] All the years that I have been immersed in tax issues, I have believed -- like most everybody else who thinks about it -- that the burden of taxes should be steered away from the poor and the sick. With the tobacco tax, the government has devised an efficient method of extracting a lot of revenue from the poor and the sick. And on top of that, the government fancies itself virtuous in the act.

[10] Of course, anybody who would dare oppose the tobacco tax is in for an uphill fight. It would not be "p.c." The only vocal opponents to cigarette taxes are the big, bad cigarette companies with a public image not much better than that of Saddam Hussein. And don't expect much opposition from smokers themselves. Smokers are by nature apolitical. Whether on a barstool, or shivering outside some smoke- free edifice, the conversation rarely turns to whether George W. will be competitive with Alpha Al.

[11] The nonsmoking majority generally has little patience for complaints from smokers about cigarette taxes. Smoke annoys nonsmokers. And after all, if the cigarette tax really bothers the smokers, they can quit, and that would be the best thing for them. The burden of the tax is focused on one of the most disrespected segments of the population that is one of the most politically disenfranchised.

Cruel to Be Kind?

[12] The advocates of taxing cigarettes very much believe they are doing good. And no doubt in some ways they are. By raising the price of cigarettes, they are inducing some people to reduce their smoking and still others to quit smoking.

[13] Perhaps more importantly they are providing a strong economic disincentive for young people to ever begin. Given the addictiveness of tobacco and the higher value we naturally place on the well-being of the young, discouraging teenage smoking is a particularly meritorious objective. And, indeed, numerous studies show that taxes are far more effective in reducing smoking by cash- strapped teens than their usually more affluent adult counterparts.

FIGURE 1 FEDERAL TOBACCO EXCISE TAX REVENUE AND TAX PER PACK OF CIGARETTES, 1998-2003

[figure omitted]

[14] And by raising tobacco taxes, anti-smoking advocates are raising revenue that allows the government to cut other taxes or perhaps fund government programs that do some good.

[15] But just as sure as cigarette taxes are doing good, there can be no denying they are also doing harm. Cigarette taxes reach into the pockets of tens of millions of Americans who are at the lowest social and economic classes. But, like advocates of almost any cause fighting a tough political battle, advocates of higher cigarette taxes cannot allow themselves to concede that their policy prescription may have harmful side effects. The following excerpt from the web page of the Maryland Children's Initiative (www.smokefreemd.org/initiative/taxfaq) is an example of how anti- smoking groups seem to be in denial on this issue:

Question: Doesn't a tobacco tax hike unfairly hurt poor
people and African Americans?

Answer: No. The tobacco industry has targeted the poor and
people of color for many decades. As a result, poor people and
people of color smoke more, get sick more and die more than the
general public.

Prominent individuals and organizations serving lower
income people in Maryland are strong supporters of a $1.00 per
pack increase in the cigarette tax. They [are] 360+ endorsers of
the Maryland Children's Initiative....

These leaders and the organizations they represent are
concerned about the "regressive diseases" caused by smoking that
kill poor people, destroy families, and ruin lives far more than
they hurt more affluent families. They do not buy into tobacco
company rhetoric that the tax hurts the poor. If anything, they
believe keeping poor people addicted hurts them far more than a
tobacco tax increase.

[16] All that may be true, but it still does not erase the harm caused by the cigarette tax. The burdens of the cigarette tax should be weighed against the benefits. The burdens should not just simply be brushed aside. But I suppose it wouldn't be a good political strategy for the anti-smokers to lapse into frankness like: "We know that most of them are poor, but the tax really is for their own good. Sure, the vast majority of smokers won't quit if we raise the cigarette tax, but we think if we can get one teenager to quit it is worth 10 or 20 grown-ups paying more."

Benefits vs. Burdens

[17] How significant is the tax burden? How many millions of individuals will reduce smoking as a result of cigarette taxes? How many will be left worse off because they pay higher taxes and still smoke?

[18] The federal tobacco tax is 24 cents per pack of cigarettes. (The average state tobacco tax is about 34 cents a pack.) On January 1, 2000, the federal tax increased by 10 cents to 34 cents per pack. And on January 1, 2002, the tax will increase by a nickel to 39 cents per pack. So, in 2002, an individual smoking one pack a day will contribute $142.35 in tobacco excise taxes to the U.S. Treasury. A two-pack-per-day smoker will pay $284.70.

[19] In a 1998 study, the Congressional Budget Office reviewed the evidence on the responsiveness of tobacco expenditures to changes in price. ("The Proposed Tobacco Settlement: Issues From a Federal Perspective," April 1998, available on the Web at www.cbo.gov.) The CBO concluded that for every 1 percent increase in price, the reduction in the amount of expenditures would be between one-quarter and one-half of a percent.

[20] Currently, the price of cigarettes is about $3 a pack. Let's assume that by 2002, when the federal cigarette tax is 39 cents per pack, the price of cigarettes is $3.15. What good has the cigarette tax done for the cause of reducing smoking? It will have raised the price of cigarettes by 14 percent. That means it will have reduced cigarette demand by at most 7 percent.

FIGURE 2 DISTRIBUTION OF BURDEN OF FEDERAL TOBACCO TAES, BY INCOME

[figure omitted]

[21] Suppose, for simplicity, that tax-induced reductions in smoking were just the result of smokers quitting. (Actually, the CBO estimates that between one-half and two-thirds of the reduction in smoking arising from a price increase is attributable to a decline in the percentage of people who smoke. The remainder is due to a decrease in the number of cigarettes that smokers consume.) If in 2002, there are 46 million smokers in the United States as there are now, a 7 percent decline in the number of smokers would reduce the total from 46 million to 43 million. So, to induce 3 million smokers to quit, the federal government taxes 43 million.

[22] Of these 43 million tobacco taxpayers, 19 million have incomes below $30,000. (See Figure 2, below.)

Lotto

[23] When I was growing up in New Jersey, numbers games were illegal. But almost everybody played "th' numbas." Almost every corner store and saloon took bets. The actual number was the last three digits of the total mutual handle at Belmont. The number would be published every morning on the next to last page of the New York Daily News. There were a thousand possible outcomes and a 500-to-1 payoff. (A successful $1 match paid $500.) Despite their omnipresence, numbers games could be serious business. The father of one of my elementary school classmates actually served jail time for taking numbers.

[24] Numbers games are gambling. Some people think gambling is fun, and some think it is a vice, and both are right. But somewhere along the way, state governments decided to convert this fun vice into revenue -- not by legalizing it and taxing it -- but by granting themselves monopolies to run numbers and lotteries.

[25] Before the states took it over, organized crime ran the numbers. The Mafia understood how to raise revenue from low-income households. This was well-noted by Pulitzer-prize winning author Jimmy Breslin in his 1969 novel, The Gang That Couldn't Shoot Straight: "The Mafia was left with only the poor to protect. As only so much can be taken from the poor by terror, subtler methods must be used. Sell women or narcotics or the chance to gamble or whiskey to the poor."

[26] "Modern" lotteries started in New Hampshire in 1964. During the 1970s only New York and a few other states joined the Granite State in the operation of commercial lotteries. Despite the slow start, lotteries caught on quickly in the 1980s. Today 37 states and the District of Columbia operate lotteries.

[27] Total lottery receipts in 1997 were $36 billion. Fifty- five percent of this total was returned to players in the form of prizes. (The payout rate is much lower than other forms of commercial gambling, such as horse racing and slot machines.) Twelve percent was used for operating costs. The remaining 33 percent provided revenue for state treasuries.

FIGURE 3 AVERAGE ANNUAL PER EXPENDITURE ON LOTTERIES (AMONG LOTTER PLAYERS) BY INCOME CLASS

[figure omitted]

[28] In only 10 of the 38 jurisdictions (including the District of Columbia) were net revenues from lotteries used exclusively for general funds. Sixteen states earmark all or part of the revenue for education; the rest was earmarked for a variety of other uses. Net revenue from lotteries amounted to 2.2 percent of own-source revenues for those states operating them. (Charles T. Clotfelter, Philip J. Cook, Julie A. Edell, and Marian Moore, "State Lotteries at the Turn of the Century: Report to the National Gambling Impact Study Commission," April 23, 1999, available at www.ngisc.gov/reports/lotfinal.pdf.)

[29] Like smoking, lottery gambling has a larger impact on the pocketbooks of poor and lower-middle class families. Nationwide about one-half of all households have members who play the lottery. Participation rates are highest for middle-class households, but for all income categories participation rates are reasonably close to 50 percent.

[30] What is striking is how the average annual lottery purchases vary across income classes. As shown in Figure 3, the poor spend a lot more on lotteries than do the rich. Families with incomes below $10,000 average $597 of lottery purchases annually. (That's about 6 percent of income for a family with an income of $10,000.) Families with incomes above $100,000 average $289 of lottery purchases. (That's about 0.3 percent of income.) When state governments operate lotteries they are profiting at the expense of the poor.

[31] It would be one thing if states just felt the need to provide an above-board substitute for gambling that would take place illegally anyway. But many states actively encourage lottery participation using high- powered marketing, even though they well know that many of their players are poor and addicted to gambling. According to the Clotfelter study cited above, 5 percent of players (who played more than $3,870 per year) accounted to 54 percent of all lottery sales.

[32] To me this is pathetic behavior on the part of state governments. It is another example of the hypocrisy of politicians. In one breath policymakers are deploring the lack of saving and retirement security for the poor. In the next breath the same folks are promoting programs that are encouraging the poor to participate in financial practices that make day-trading look sensible.

[33] For a variety of good reasons, we should encourage poor people to save. And, indeed, many federal and state government programs are beginning to do that. (See "Bipartisan Support Growing for Antipoverty Development Accounts," Tax Notes, Sept. 27, 1999, p. 1692.)

[34] If instead of spending $500 a year on lottery tickets, an individual invested $500 a year in the stock market starting at age 25, he or she would have $400,000 available for retirement at age 65. No financial planner encourages clients to play the lottery. Why should the government?

Real People

[35] Supporters of higher cigarette taxes would be as inclined to attack the views expressed here as those of the tobacco industry. They may well be. But that does not mean I support -- or am supported by, as many politicians are -- the tobacco industry. I wish nobody would smoke. I believe it is extremely harmful to an individual's health. I also suspect the tobacco companies have been following their profit-maximizing instincts and done everything in their power to increase tobacco consumption.

[36] But it is precisely because I believe smoking is so vile that I favor a reduction of the cigarette tax. Smokers are addicted to a habit that is likely to take a decade off their lives.

[37] Supporters of lotteries might think I don't support public education, or that I am a prude about gambling. Both are false. With two children in public school, my personal inclinations are to support almost any initiative that increases education funding. And I like to go to the track.

[38] But it is precisely because the evils of lottery gambling have been trivialized that I oppose government sponsorship of them. Lottery players are suckers. State governments are preying on their weakness and conning millions of them out of tens of thousands of dollars over their lifetimes.

[39] Even if nicotine and gambling were not addictive, I would favor a reduction in the cigarette tax and a discontinuation of government- sponsored lotteries. Just because some individuals have made a willful choice that is not in their self-interest should not make them punishable with levies that inure to our benefit. Those people should attract our compassion, not our contempt.

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