Sin Tax: Definition, How It Works & Examples

KEY TAKEAWAYS

• A sin tax is a specific type of tax that gets levied on certain goods and services deemed to be harmful. The goal is to try and deter people from engaging in destructive behaviors and activities.
• Some of the most common items to be subject to a sin tax include tobacco, alcohol, and gambling endeavors.
• Sin tax provides an extra stream of revenue for governments.

What Is a Sin Tax? 

A sin tax is a specific type of tax that gets levied on various goods and services that have been deemed damaging to society as a whole. The specific goods and services that are subject to a sin tax include alcohol, tobacco, and gambling ventures. 

The primary reason for levying a sin tax on these types of goods is to try and deter people from using them. Ultimately, a sin tax is meant to limit the possibility of people taking part in activities and behaviors that can be harmful. However, it’s important to note that a sin tax also provides an additional stream of revenue for governments that implement it.

Examples of Sin Tax

Sin tax is placed on services or products that could be harmful to people. It can apply at both the federal and state tax levels. At the federal level, sin taxes are fixed amounts. At the state level, sin taxes can vary slightly depending on the specific state and where you’re located. 

A perfect example of a sin tax is the tax levied against gasoline. The revenue generated from this by the government can help finance additional construction for highways and roads. 

Here is a list of some of the most common examples of a sin tax: 

• Cigarettes and other tobacco products 
• Alcohol 
• Certain types of drugs 
• Candies
• Fast food
• Sugar and candies 
• Lotteries 
• Tanning salons
• Gambling
• Firearms
• Fishing gear
• Wager 
• Jet fuel
• Gasoline 
• Foreign insurance 
• Tickets for air travel 
• Tickets for cruises 

How Does a Sin Tax Work? 

If the government decides that certain products or services are — or could be — harmful to society in general, they can implement a sin tax. The most common sin tax applies to the sale of liquor, tobacco, and gambling. 

In the United States, sin taxes get levied at the time a product gets produced or when certain services are performed. The main goal of a sin tax is to lower the total demand by increasing the total price of goods and services. 

Ultimately, sin taxes are a form of Pigovian tax. This is where taxes are levied to offset damage costs caused by the detrimental use of the product or service. 

It’s worth highlighting that, unlike a sales tax, a sin or excise tax only applies to and gets levied against specific goods and services. A sales tax, for example, applies to almost every transaction with the exception of a few. 

As well, sales taxes get applied at the point of sale when a purchase is made. Sin taxes, in most cases, are incurred when the product is manufactured. The purpose of sin taxes is to increase the price of a product or service to try and deter consumers from purchasing it. 

It can depend on the type of sin tax, but it can get imposed on a manufacturer, a retailer, or even the consumer. Aside from the benefit of deterring consumers from taking part in harmful activities, governments also benefit from revenues generated from sin taxes. 

Washington state, for example, has one of the highest liquor taxes in the nation. The sales tax rate for consumers is 20.5%. The rate for on-premises retailers, such as restaurants and bars is 13.7% (since spirits are purchased for resale). The state tax rate for a carton of cigarettes is $30.25; cigarettes are also subject to sales tax. The tax is due when the cigarettes are brought into Washington.

Revenue generated from the sin tax can be used by both federal and state governments to engage in or support new projects. These would be projects that have a positive social and economic impact and goal. 

With that said, the way that governments use the revenue from sin tax can vary from country to country. For example, the funds generated from the sin tax in Sweden get used to help people overcome gambling addictions. 

Pros of Sin Tax 

The biggest benefit of a sin tax is that it helps stop people from engaging in potentially harmful or dangerous activities. For example, the sin tax levied against tobacco products will increase the retail price, making it harder for people to afford them and ultimately limiting their use. 

Governments significantly benefit from sin taxes. The generated tax revenue may then fund   social and economic projects that will benefit the country or state where they’re implemented.

Criticisms of Sin Tax 

While there are some major benefits of imposing a sin tax, there are still a few criticisms worth mentioning. Many smaller governments have argued that imposing a sin tax can give a government more power and cause them to overreach. 

The main argument against a sin tax is that it singles out a specific product or service. Ultimately, it’s argued that this can lead to social engineering and even the government evolving into the role of a nanny state. 

Another criticism is that it could negatively affect the uneducated and the poor. For instance, the less money an individual earns in a tax year means the harder it is for them to afford these types of taxes. 

For example, an individual that smokes a pack of cigarettes a day and makes $30,000 per year ends up paying the same sin tax as someone that smokes a pack a day and earns $250,000 per year. This means that the individual with a lower income is required to use a substantial portion of their paycheck to cover these costs comparatively.

Summary

Sin taxes are specific types of excise taxes that get levied against certain products and services. Products and services that could have harmful or negative effects and behaviors are subject to a sin tax. These can include tobacco, alcohol, gambling, gasoline, jet fuel, firearms, and soft drinks. 

Governments benefit from sin taxes since they can provide an additional revenue source. In turn, the revenue can be put towards social and economic projects such as highway construction. Sin taxes get applied to goods and services when they’re produced or resold. This is different from a sales tax, which gets charged at the point of sale when a purchase is made.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.