Ask a room full of people for those who would choose to be taxed and no one may come forward. It isn’t a surprise that most people avoid taxes whenever possible. Taxes are also a fact of life and come in many forms. Let’s focus on sin taxes– programs designed to raise revenue while discouraging the consumption of goods or activities deemed unhealthy or costly to society. Think about taxes on cigarettes, alcohol, gambling, and sugary drinks- if these taxes are out of sight, are they also out of mind?
A quick aside, the federal government collected a record total of $4.9 trillion in gross taxes in fiscal year 2022. Take note of the relatively small amount corporations pay (business income taxes) in total- as written in a prior Leadership Matrix post, a percentage share that has been decreasing. That’s a different story for another day- this is a post on sin taxes.
How much do sin taxes affect pricing? The taxes imposed in Chicago for a pack of cigarettes includes $2.98 state tax, $3.00 Cook County tax, and $1.18 Chicago tax, resulting in the cost for a pack of premium cigarettes costing $17. The cigarette taxes in Chicago- America’s third-largest city- are the highest in the country. To avoid taxes, illegal smuggling markets have developed, which has resulted in the loss of an estimated $334 million in lost cigarette tax revenue for the State of Illinois in 2020. Smuggling operations affect every state and for every type of sin tax. Looking at alcohol taxes, Washington has the highest tax in the nation at $33.22 per gallon, followed by Oregon ($21.95) and Virginia ($19.89); the State of New Hampshire has no alcohol tax and sells all spirits through state-run liquor stores.
To gauge the effectiveness of sin taxes, Booth researchers from the University of Chicago find that sin taxes work best when the tax is shown on the price tag- effectively showing the price of the product before and after the tax. They also conclude that sin taxes are likely to reduce demand more if they are displayed on the shelf by the product.
Should sin taxes be taken a step further and displayed beside the product for which the tax is designed to discourage the use or consumption of? Or is it better to keep six taxes out of sight? Read the article and let me know by clicking here to email me!
~ Brian Kasal- The Leadership Matrix
Click here- Sin Taxes Work Best When They’re Put on a Price Tag
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P.S.- Did you see my last Leadership Matrix post? The Number of People Working From Home