Taxes on alcohol and nicotine products, sometimes called sin taxes, are applied in addition to regular sales taxes. They are collected from alcohol and cigarette producers and distributors and applied as a certain amount per unit sold, such as three dollars per pack of cigarettes. These costs are then passed down to the consumer by being added to the total purchase price. There are two main reasons for these taxes: they are intended to deter people from smoking and drinking excessively, and they are an easy way for the government to bring in more money.
In states where it is legal, marijuana is also taxed at a higher rate. In Colorado, starting July 1, 2018, the state will begin collecting the greater of either 90 percent of the revenue annually collected from marijuana or the first $40 million collected. The remainder of the revenue will be added to the state public school fund. In Washington state, money from marijuana taxes helps to fund Medicaid. State and local governments collected a total of $18 billion in revenue from tobacco taxes and $16 billion from alcohol taxes in 2015.
In addition to providing revenue for the government, there are public health benefits to these taxes. Excessive alcohol consumption contributes to many health and social problems, such as unintentional injuries (from motor vehicle crashes, for example), suicide, homicide; liver problems, cancer, vandalism, and lost productivity. Nearly all studies conducted on the topic have found that as the price of alcohol increases due to higher taxes, the occurrence of underage drinking and alcohol-related motor vehicle deaths decreases.
There are some general rules of economics at play here that aren’t necessarily specific to alcohol and cigarette taxes. The law of demand states that “all else held constant, quantity demanded falls when the price rises.”
Despite evidence of lower health costs and fewer deaths, there are arguments against sin taxes. Of course, alcohol and cigarette manufacturers and related industry groups lobby against these taxes, but some consumers do as well. One school of thought is that it is not the government’s place to regulate what we put in our bodies. There is also a concern that the taxes will have a disproportionate effect on people in lower income brackets because poorer people are more likely to continue drinking or smoking despite the costs. Alabama, for example, is one of the poorest states in the country, yet its beer tax is the third highest in America.
Sin taxes also don’t work to curb substance use for everyone. Some people are addicted to cigarettes and alcohol and will continue using them even if they can’t afford it. Others might switch to more harmful substances as a result of the price increase. A pack of cigarettes can cost between five and twelve dollars, depending on the state. For smokers with a pack-a-day habit, that can add up to $360 a month. An ounce of marijuana, on the other hand, can sell on the street for two hundred dollars and generally lasts a month or two.
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