Sin Taxes as a Mechanism of Health Care Finance

Abstract

The use of sin taxes to finance health care may be a viable means of raising much-needed revenue for the laudable goal of improving access to medical care, although the underlying justifications for adopting such a policy must be carefully examined. Clinton Administration officials have repeatedly spoken in support of financing health reform through an increased sin tax on tobacco—at the time of this writing the proposed increase in the federal portion of the excise tax on a pack of cigarets was from 26 to 99 cents. The Administration’s position seems to be based on the belief that individuals ought to be taxed to defray the excess health costs their use of certain products imposes on society as a whole, such as the increased health problems and subsequent use of health care by smokers and heavy drinkers. Such a position presumes that current levels of state and federal excise taxation (or sin taxes) are insufficient to neutralize the excess costs caused by certain behaviors. Some of the recent literature analyzing the economic impact of smoking indicates that the rate of excise taxation on cigarets is very near the cost-neutral point with respect to excess costs smoking creates.¹ If excise taxation increases at a rate keeping pace with or eclipsing the rate of increasing costs of health care, basing further increases of excise taxation on the need to pay for excess health care costs becomes increasingly dubious. However, those proposing such legislation need only foster the perception of a gap between excess costs and current tax levels, since popular acceptability for such taxes may be the primary means to reach the end of revenue enhancement. Further, increased taxes on tobacco can be supported on a variety of policy bases, with everything from public health to worker productivity served along with revenue enhancement and forcing smokers to pay their way. As will be demonstrated in this chapter, a combination of policy justifications makes for a stronger case for an increased sin tax on tobacco than mere reliance on seeking to recoup the excess social costs caused by smoking.