Theo Nash
Excise taxes, or sin taxes, are levied on goods and services that are deemed harmful to society and individuals, such as alcohol and tobacco. In 2022, federal excise tax revenues totalled nearly $90 billion, with alcohol and tobacco taxes accounting for $10.2 billion and $11.3 billion, respectively. While sin taxes are intended to discourage consumption and promote better public health outcomes, they have also been criticised for unfairly targeting certain groups, particularly those with lower incomes. This raises the question: what earns more money, the tax on alcohol or tobacco?
| Characteristics | Values |
|---|---|
| Average state tax revenue from tobacco sales in 2020 | $64.02 per person |
| Average state revenue from alcohol taxes in 2020 | $21.67 per person |
| Average tax on cigarettes in 1993 | $0.53 per pack |
| Average tax on cigarettes in Denmark | $3.48 per pack |
| Average tax on cigarettes in Norway | $3.11 per pack |
| Alcohol taxes in Alaska in 2020 | $63 per person |
| Alcohol taxes in Tennessee in 2020 | $62 per person |
| Alcohol taxes in Utah in 2020 | $2 per person |
| Alcohol taxes in Wyoming in 2020 | $3 per person |
| Tobacco tax in South Carolina | $5 per person |
| Tobacco tax in Missouri | $17 per person |
| Tobacco excise taxes in Missouri | $0.17 per pack |
| Tobacco excise taxes in Connecticut and New York | $4.35 per pack |
| Excise tax revenue from alcoholic beverages in 2022 | $10.2 billion |
| Revenue from tobacco taxes in 2022 | $11.3 billion |
| Federal excise tax revenues in 2022 | $90 billion |
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What You'll Learn
Excise taxes on alcohol and tobacco
Excise taxes are levied on specific goods and services deemed harmful or costly to society. They are collected from producers or wholesalers and embedded in the final price paid by consumers. In the United States, excise taxes are imposed on various goods and services, with the most prominent being alcohol and tobacco. These are commonly referred to as "sin taxes", due to the perception that the consumption of these goods is immoral or sinful. Excise taxes on alcohol and tobacco aim to generate revenue for the government and discourage consumption, particularly among younger consumers and those with less disposable income.
Alcohol excise taxes can be based on either the volume of alcohol sold at the wholesale level or the retail price of alcohol. In 2020, Alaska had the highest per-capita alcohol tax earnings at $63 per person, while Utah collected the lowest at $2 per person. Excise tax revenue from alcoholic beverages in the United States amounted to $10.2 billion in 2022, contributing 12% of total excise receipts. There are different tax rates for distilled spirits, wine, and beer, with distilled spirits typically taxed at $13.50 per proof gallon. Wine tax rates vary depending on type and alcohol content, ranging from $1.07 per gallon for wines with 16% alcohol or less to $3.40 per gallon for sparkling wines.
Tobacco excise taxes are calculated per thousand cigars or cigarettes or per pound of tobacco. The tax equals about $1.01 per pack of 20 cigarettes, and cigarette papers and tubes are also taxed. In 2022, revenue from tobacco taxes in the United States totalled $11.3 billion, accounting for nearly 13% of all excise tax revenue. Federal excise taxes are imposed on various tobacco products, including cigarettes, cigars, smokeless tobacco, and pipe tobacco. Tobacco taxes are collected when the products leave bonded premises for domestic distribution, with exported products being exempt.
While sin taxes on alcohol and tobacco have been effective in reducing consumption, particularly among youth and lower-income groups, they have also faced criticism. Some argue that these taxes unfairly target certain groups, disproportionately impacting those with lower incomes. Additionally, critics claim that sin taxes do not always change consumer behaviour as intended, as individuals may switch to cheaper alternatives or mix their drinks instead of buying pre-mixed spirits. Furthermore, the enactment of sin taxes has led to the illegal manufacture, smuggling, and theft of taxed products for personal use or sale on the black market.
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Tax rates and credits
Taxes on alcohol and tobacco are known as "sin taxes" or "corrective taxes". They are excise taxes levied on goods and services deemed harmful or costly to society. The rationale behind sin taxes is that by increasing the price of these goods, people will be less likely to buy them, leading to improved public health outcomes and reduced healthcare costs.
In the United States, sin taxes are implemented at the federal, state, and local levels. While sin taxes are meant to discourage consumption, they also generate significant revenue for state governments. In 2023, for example, states collected $23 billion in sin taxes on tobacco and alcohol. However, as consumption of these goods decreases due to higher taxes, the revenue from sin taxes declines over time, making it an unreliable source of income for governments.
Sin taxes have been criticized for disproportionately affecting lower-income individuals. Since sin taxes are often assessed at a flat rate, they account for a larger portion of the total price paid by lower-income consumers. For example, a pack-a-day smoker earning $30,000 per year spends the same amount on cigarette taxes as someone earning $230,000 per year. While studies have shown that lower-income consumers are more likely to change their behaviour in response to sin taxes, critics argue that they fail to affect consumers' behaviour as intended.
There are different tax rates for distilled spirits, wine, and beer. Distilled spirits are generally taxed at $13.50 per proof gallon (a liquid gallon that is 50% alcohol). Tax rates on wines vary based on type and alcohol content, ranging from $1.07 per gallon for wines with 16% alcohol or less to $3.40 per gallon for sparkling wines. Beer tax rates may also vary depending on the state, with some states not having a beer tax at all.
In addition to federal and state sin taxes on tobacco, there are also local taxes. Tobacco products are typically taxed in two ways: the unit tax, which is based on a constant nominal rate per unit (per pack of cigarettes), and the ad valorem tax, which is based on a constant fraction of the wholesale or retail price. Federal taxes on cigarettes, small cigars, and smokeless tobacco products are usually unit taxes, while federal taxes on large cigars are ad valorem taxes.
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State tax revenue
State governments favour sin taxes as they generate enormous revenue. In 2023, states collected $23 billion in sin taxes on tobacco and alcohol. In 2022, federal excise tax revenues—collected mostly from sales of motor fuel, airline tickets, tobacco, alcohol, and health-related goods and services—totalled nearly $90 billion, or 1.8% of total federal tax receipts.
Sin taxes are implemented to discourage consumption of the taxed products or to raise revenue for the government. They are typically added to liquor, cigarettes, and other goods deemed bad for society. The rationale behind sin taxes is that by making these products more expensive, people will be less likely to buy them, which can result in better public health outcomes and reduced healthcare costs.
Sin taxes are typically regressive taxes, which means that the less money a person makes, the more significant a percentage of their income these taxes consume. Critics argue that sin taxes unfairly target certain groups, disproportionately impacting people with lower incomes. Studies have shown that sin taxes can be effective in curbing the use of targeted items. For example, researchers found that increases in cigarette taxes have led to reduced smoking rates.
Sin tax revenue is generally spread out across many government programs. Some money from sin taxes is spent on treatment programs for people struggling with the good being taxed. For example, revenue from taxes on cigarettes can be spent on public health initiatives to discourage smoking. Most of the money from sin taxes is absorbed into the general budget and is spent on things like education, infrastructure, pension plans, fire, police, and other government programs.
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Effectiveness of sin taxes
Excise or "sin" taxes on alcohol and tobacco aim to promote or deter certain behaviours. These taxes are intended to discourage the consumption of these substances by making them more expensive, thereby reducing the burden on the healthcare system and improving public health outcomes.
Sin taxes can be effective in reducing the consumption of harmful goods and improving population health. Studies have shown that sin taxes reduce the behaviour they are meant to discourage, especially among younger consumers and those with less disposable income. For example, a 10% tax on cigarettes lowers the demand for cigarettes by 4%, and the effect is more pronounced for adolescents and teens, with a 10% tax lowering smoking rates by nearly 12% for 12- to 17-year-olds. Similarly, taxes on alcohol have been found to reduce overall alcohol consumption, with a more significant impact on heavy drinkers. A hypothetical 25-cent-per-drink tax would reduce alcohol consumption by 9.2%, and heavy drinking by 11.4%.
Sin taxes can also generate additional revenue for the government. In 2022, federal excise tax revenues, which include taxes on tobacco and alcohol, totalled nearly $90 billion, or 1.8% of total federal tax receipts. However, it is important to note that sin taxes are typically regressive, impacting people with lower incomes disproportionately. There is also a concern that sin taxes represent government overreach and social engineering, as they single out specific products or services for additional taxation.
While sin taxes can be effective in the short term, states should carefully assess their sustainability in the long term. For example, the decline in tobacco consumption due to increased taxes has resulted in a drop in tax revenue from this source. As a result, states may need to continuously increase tax rates or find other sources of revenue to maintain budget stability.
In conclusion, sin taxes can be an effective tool for supporting public health objectives and generating additional revenue in the short term. However, policymakers should carefully evaluate their purpose and potential pitfalls, especially when considering emerging sin taxes in volatile markets with limited data.
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Tobacco tax calculations
Tobacco taxes are levied as excise taxes, which are consumption taxes collected on specific goods and services. Excise taxes on tobacco are collected by the Alcohol and Tobacco Tax and Trade Bureau of the US Treasury Department. These taxes are calculated per thousand cigars or cigarettes or per pound of tobacco, depending on the product. For instance, the tax on a pack of 20 cigarettes is about $1.01. Cigarette papers and tubes are also taxed.
In 2022, federal excise tax revenues, which include tobacco taxes, totalled $90 billion, or 1.8% of total federal tax receipts. Tobacco tax revenues specifically totalled $11.3 billion, accounting for nearly 13% of all excise tax revenue.
At the state level, tobacco tax rates vary. In 2022, tobacco excise taxes ranged from 17 cents per pack in Missouri to $4.35 per pack in Connecticut and New York. In 2020, the average state tax revenue from tobacco sales was $64.02 per person, with South Carolina having the lowest per-capita tobacco tax revenue at $5 per person, and Alaska and Rhode Island at the high end with $132 and $130 per person, respectively.
Some states use a portion of tobacco tax revenues to fund smoking and tobacco use prevention programs, as well as programs like the Children's Health Insurance Program (CHIP). The rationale behind high tobacco taxes is to discourage tobacco consumption, thereby improving public health outcomes and reducing healthcare costs. Indeed, studies have shown that increases in cigarette taxes lead to reduced smoking rates.
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Frequently asked questions
Sin taxes are excise taxes levied on certain goods deemed harmful to society and individuals, such as alcohol and tobacco. They are called sin taxes because they are meant to discourage consumption by making these products more expensive.
It depends on the location and the year. In the US in 2022, revenue from tobacco taxes totalled $11.3 billion, while excise tax revenue from alcoholic beverages amounted to $10.2 billion. However, in 2020, the average state tax revenue from tobacco sales was $64.02 per person, while the average across all 50 states and Washington, DC, from alcohol taxes was $21.67 per person.
Proponents of sin taxes argue that they help to reduce consumption of harmful products, particularly among younger consumers and those with less disposable income. The revenue generated from sin taxes is also used to fund government programs.
Critics argue that sin taxes are regressive in nature and disproportionately affect lower-income consumers. They also argue that sin taxes do not effectively change consumer behaviour and may even lead to an increase in illegal activities such as the manufacture, smuggling, and theft of the taxed products.
