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David Callahan

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Sin Taxes Are Bad Public Policy

Posted: 12/12/2012 10:23 am

We all know that smokers and drinkers cost our healthcare system a fortune thanks to their self-destructive behavior. So it makes sense to heavily tax cigarettes and booze as a way to bring down the deficit or fund government healthcare programs. Right?

Well, no.

In fact, the economic case for so-called "sin taxes" is highly questionable -- quite apart from whether such taxes tend to be regressive, hitting lower-income Americans the most.

Here's the obvious flaw in the logic of sin taxes. Yes, smokers and drinkers incur high healthcare costs when they get lung cancer or liver disease and die prematurely. But if these same people live much longer, and go on to suffer other health problems, their net consumption of healthcare resources could end up being the same or even greater.

What's more expensive: Having Jane Doe die of lung cancer at 62 or having her live on for another two decades, getting a hip replacement and some other tuneups, before finally dying of colon cancer?

Tallying up the ultimate healthcare costs for smokers versus non-smokers is complicated, and it's fair to say that expert opinion is divided on this subject. A well known 2008 study by the Dutch government, for example, found that long-living people who didn't smoke and weren't obese actually rang up bigger healthcare costs over time:

Until age 56 annual health expenditure was highest for obese people. At older ages, smokers incurred higher costs. Because of differences in life expectancy, however, lifetime health expenditure was highest among healthy-living people and lowest for smokers. Obese individuals held an intermediate position.

Similarly, a 1997 study published in the New England Journal of Medicine found that:

If all smokers quit, health care costs would be lower at first, but after 15 years they would become higher than at present. In the long term, complete smoking cessation would produce a net increase in health care costs, but it could still be seen as economically favorable under reasonable assumptions of discount rate and evaluation period.

People who die prematurely don't just stop costing the healthcare system money, they also don't collect Social Security benefits. And one reason that our entitlement system for seniors faces such strains is because people are taking care of themselves better and living longer. A generous safety net for the elderly was easier to sustain in the Mad Men era when more than 40 percent of adults smoked, people drank like fish and nobody had ever heard the word cholesterol. Both my grandfathers, who epitomized this era, died relatively young. A healthier grandmother of mine, in contrast, who is now 99, has been in a nursing home for well over a decade, suffers from Alzheimer's and requires round-the-clock care.

Now, of course, there are a pile of studies saying that smoking and drinking really do cost society more. And it's impossible to quantify the positive benefits of increased longevity. Longer life spans are one of the great achievements of the modern era. Certainly there are plenty of good arguments for getting people to smoke less or generally take care of themselves -- but it's not clear that tax policy is the place to pursue those goals.

Yet sin taxes are now a staple of our tax system, particularly at the state and local level. Congress raised the federal tax on cigarettes in 2009 to over $1 as part of reauthorizing SCHIP. And now some federal tax plans, most recently one released by the Center for American Progress, would raise sin taxes as part of a fiscal cliff deal. CAP's plan calls for again hiking cigarette taxes, by 50 cents a pack, and also increasing taxes on alcohol.

This is a questionable proposal given the muddy debate over the actual costs of smoking and drinking. And there may also be a strong argument that such sin taxes are regressive. I say "may" because this, too, is a murky area: Yes, low-income Americans are said to account for half of all smokers, meaning that they shoulder a huge burden of taxes on cigarettes. On the other hand, smokers who quit because of higher taxes are likely to live longer and collect more in government benefits. Also, getting poor smokers to quit relieves them of the costs of paying for cigarettes. So maybe cigarette taxes are more progressive than they look.

As I said, this stuff is complicated. And until the economics of sin taxes become clearer, we should look for other ways to raise tax revenue.

 

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