Should there be an extra tax on alcohol, tobacco, drugs, vaping products? How about gambling and pornography? Or candy, soft drinks, and fast food? A sin tax is often levied on many of these products, because society sees them as being harmful. This is one of Governor Pillen’s proposals as a way to reduce property taxes in Nebraska.
The idea is based on sound economic principles. If the price goes up, as it would if an additional tax is added, then demand goes down. These are products with “negative externalities.” Many affect people’s health and raise what we all pay for health care and insurance. Some disrupt home life. And some encourage illegal activity.
Research on the tax on tobacco, found at Investopedia.com, shows that a 10% increase in the price, due to the added tax, decreases tobacco use by 4%. It’s much higher for younger people, 12%, because they haven’t developed the habit and addiction.
It sounds like this is the way to go. Not necessarily.
Sin taxes, sales taxes, and most excise taxes that are added to the price of goods, are regressive. Very regressive. This means low income people pay a much higher percentage of their income than would those who are wealthier. The OpenSky Policy Institute in their July 26, 2024, email update said that the sales tax shift stands to increase the already disproportionate effect on the lowest income earners who already pay 5.5% of their household income in sales taxes, compared to 1.1% of the highest income earners.
A recent article in the Nebraska Examiner July 22, 2024, talks about the Governor’s proposed increases for sin taxes. Those taxes were estimated to raise more than $216 million in the first full year, if passed:
• Cigarettes — $1.64 per pack, up from 64 cents.
• Spirits — $14.50 per gallon, up from $3.75.
• Vaping — 30% wholesale tax.
• Keno — the state would collect 5% of keno sales.
• Games of skill (cash devices) — 20% tax.
• Consumable hemp — 30% tax.
Candy and soft drinks would lose the sales tax exemption granted to grocery products, so they are also being classified as sin taxes.
Federal and state governments already levy high sin taxes on tobacco, alcohol, and gambling, and they have for years. Do you remember studying the “Whiskey Rebellion” that plagued President George Washington’s administration? They levied a tax on the whiskey made by Pennsylvania farmers who found that whiskey was the easiest way to get their corn to market. After Prohibition ended, President Franklin D. Roosevelt decided it was once again time to tax alcohol.
These taxes bring in billions. Because they generate so much money for governments, they are one of the first things legislative bodies propose increasing when they face a budget shortfall. Most of the taxed products and activities are ones that a minority of the population buys. Society accepts sin taxes because they affect only those using those products, and we convince ourselves that we are “helping” the users. These are products that low income households are much more likely to buy. Is it reasonable to use the tax as a punishment?
Are there other downsides of six taxes? Of course. How about travelling to other states where the products are less expensive and then reselling them on the black market? Will we see illegal manufacture, like we do with many drugs? Probably. At the very least, we can expect people to buy cheaper, more harmful versions of the products they use.
Taxing sin might be reasonable if the revenue from these taxes was used to address the negative consequences caused by using those products or engaging in those activities. However, that won’t happen. The funds will go into the general fund, and the state will argue that it will pay for public schools. And reduce property taxes.
Sin taxes will affect lower-income Nebraskans, who have to spend (rather than save or invest) a higher percentage of their income, most of it on taxable items. And they participate at a higher rate in using the harmful products being proposed for additional taxation. They certainly won’t get the greatest benefit from the proposed changes.
Governor Pillen should be applauded for attempting to address the increasing burden placed on property owners. It will be interesting to watch the Special Legislative Session to see what property tax relief will be passed and what it will mean for Nebraskans.