Naughty Or Nice: What If Santa Claus Had To Levy Sin Taxes?


It’s that time of year for that jolly man in the red suit. He’s making his list, checking it twice, and finding out who’s naughty or nice. Maybe I’ve already overdosed on holiday cookies, but I’ve been thinking about how governments are a bit like Santa Claus

Governments decide on “nice” gifts for taxpayers such as spending on public programs or tax cuts, or “naughty” lumps of coal like spending cuts or tax increases. They check their revenues, much of which come from taxes, at least twice.

But unlike Santa, governments want at least some residents to be a little “naughty” and continue do things it considers harmful so it can collect “sin taxes” on their behavior. Trouble is, state governments don’t have the benefit of Santa magic to know how taxpayers will behave. 

The uncertainty makes it risky for states to count on sin tax revenue in the long run, as my Tax Policy Center colleague Lucy Dadayan explains. “Sin taxes are often viewed as budget saviors… [but] greater dependence on sin tax revenues can lead to odd incentives: part of the reason for taxing some of these activities is to discourage consumption and use rather than to maximize revenue.” 

This balancing act involves long-standing sin taxes on alcohol and tobacco, as well as emerging levies. Let’s look at three: marijuana, sugary drinks, and plastic bags in the checkout line.

What kind of high does a state want from recreational marijuana? 

While still prohibited under federal law, recreational marijuana is legal in 10 states and the District of Columbia. Seven of these states collect taxes on marijuana sales, and Lucy’s report shows they took in over $1 billion from these taxes in 2018.

TPC’s Richard Auxier told Politico that states need to ask themselves, “Why are you legalizing marijuana? Are you battling the black market? Are you dealing with equity issues within criminal justice? Are you trying to maximize revenues? Different priorities will lead you to different policies.”

An additional warning for states: Aside from Colorado and Nevada, marijuana tax revenues have fallen short of expectations. 

My home state of Michigan legalized recreational marijuana in 2018 and issued its first three licenses last month. Sales begin this week. One newly licensed marijuana seller is untroubled by the tax: “It will be just like going to buy alcohol from the liquor store or chips from Walmart.”

The business owner might be right, especially since Michigan’s marijuana tax is 10 percent—one of the lowest in the country. Michigan seems to want the revenue since the rate seems too low to curb marijuana use. The big question is: How much will consumers partake?

How thirsty is a city for soda tax revenue? 

Rates of adult obesity are now greater than 25 percent in 48 states and over 35 percent in nine. While no state has enacted a tax on sugary drinks, seven cities in four states have. They’re trying to curb obesity, improve public health, and collect revenue. 

Let’s take a look at Philadelphia, which levied a 1.5 cent-per-ounce tax on sweetened beverages in 2017. The mayor sold the tax by promising to both reduce consumption and raise revenue for early childhood programs

How has it worked out? The city’s mayor and comptroller are fighting over why to date, the city has only spent $59.2 million of the $193.8 million raised by the soda tax. Fights like this aren’t surprising when a critical service like prekindergarten depends on an unpredictable tax.

How unpredictable? Philadelphia households are buying fewer sugary drinks in the city, but they are likely buying soda elsewhere. Children’s consumption of soda has fallen, but only slightly. A study by Mathematica Policy Research, the University of Iowa, and Cornell University finds that children in Philadelphia who were high consumers of sugar-sweetened beverages before the tax reduced their consumption of added sugars from beverages by 22 percent. That’s 15 grams of sugar per day, or one gram less than you’d find in a frosted sugar cookie.  At least this modest effect is in the direction the mayor promised.

With plastic bags, maybe a disposable sin tax is the answer.

Plastic shopping bags are terrible for the environment and taxing them discourages consumers from using them. Connecticut seems to know exactly what it wants from its statewide 10-cent per bag tax: Less consumption. It isn’t counting on tax revenues over the long term. 

And it seems to be working. When the tax went into effect in August, the revenue department expected it would generate $27.7 million for this fiscal year. It recently cut its estimate to $7 million. Consumers are still buying things—sales tax revenues exceeded expectations by $46.8 million—but they are not plastic-bagging things. 

Eight states already ban single-use plastic bags. Connecticut’s law will ditch its tax and ban those bags in 2021. By then, its consumers may not even miss them.

Being Santa Claus is so much easier than levying a sin tax.

Think about it: Santa Claus knows if we’ve been bad or good. But a government levying a sin tax needs to know, or at least guess, how many of us will be bad or good, and by how much and for how long. Some revenue departments are better at this forecasting than others. Those jurisdictions where policymakers are clear about their goals will be better able to predict—and manage—future revenues. 

As for me, I’ve got some holiday shopping to do. I’ll be using a canvas bag but passing on both soda and marijuana. Hope Santa is watching.

The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.

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