The Virtue of Sin Taxes

Let us give thanks to Big Tobacco.

Without these cartoonishly evil companies, with their greedy executives and marketers, trading the lives of young and old, mothers and fathers, for profits, we might not have such a clear case of how government regulation can serve and protect citizens.

These death peddlers perfected an amazing cash-generating business model. Take a crop, package it into an addictive and easy to consume form factor, and pour the profits into advertising campaigns and market to new customers.

Along the way, they discovered a flaw in their business. Their product were literally killing their best customers. The longer a customer smoked, the more likely they would die of cancer or other smoking related health issues. The answer? Market to the young. By capturing new smokers when they are young, the more likely that customer would be addicted for life, in turn increasing the lifetime value of the customer.

Despite intense lobbying, bold-face lies, and absurd denials from Big Tobacco, class-action lawsuits and Congress finally slammed the brakes on these reckless business mercenaries.

Should a government, believing in free-trade and laissez-faire economics, interfere and regulate business and industry? As the Big Tobacco case study shows, the answer is an unequivocal YES! When a business operates at a risk to the health and well-being of its customers, a responsible government should regulate.

Which brings us to the next question. What regulation measures work best?

In order to answer this question, it is constructive to understand what makes a business succeed and grow. Distilling the success and failure of a business to the core fundamentals, it is a matter of supply and demand. There are some products and especially services that have a high supply side cost to produce. Microprocessor and automobile manufacturing are examples of products that have an enormous fixed and R&D cost. Microprocessor plants can cost billions of dollars to build before the first unit is produced. Automobile manufacturing requires a highly trained and large work force. These complex and labor-intense industries can be effectively regulated using supply-side controls.

Measures such as worker safety inspections conducted by OSHA, minimum wage laws, consumer safety inspections of their products, and by-product waste analysis by the EPA can make sure these companies are producing a safe product for the public and not abusing their workforce and polluting the environment during the process of bringing their products to market.

In the case of Big Tobacco, supply side is not a substantial barrier. The cost and difficulty of producing and manufacturing cigarettes is low relative to the profits generated from their sales.

Supply side regulation often end up being a cat-and-mouse game. The government imposes restrictions. The businesses test the efficacy of the policing. The government labors to curtail the non-compliance. The businesses explore ways to get around the hindrances of the rules, and around and around we go.

In the extreme case of the 18th Amendment, the prohibition of the sale of alcohol, the stakes were high. Dollars and lives were expended on both the outlaw and the enforcement side. The profit potential was too seductive too ignore. The demand for alcohol was unquenchable despite the criminal underground’s best efforts to service the demand. Prohibition is considered a failed experiment. The corresponding violence, rise of the Mafia, and inability to sustain the policing doomed the best intentions of the leaders of the temperance movement. Despite the failure of Prohibition, the goal of curbing alcoholism and the associated social ills was a valid concern. At the time of Prohibition, besides alcoholism, the lack of government oversight on the production, distribution and quality of alcohol was an issue. Rather than taken a measured approach towards regulation, Prohibition was a bridge too far.

Staying on the topic of alcohol supply-side controls, some states institute blue laws to limit the distribution of the sale of alcohol. For years Texas prohibited the sale of alcohol on Sundays. Today, in Philadelphia, it is difficult to purchase beer in the same store as wine and spirits. There are beer houses and separate bottle shops for wine and spirits. Also, you cannot purchase liquor past 10pm in a store on most days in the City of Brotherly Love. You also will not find beer, wine or liquor sold at convenience stores. Whether these blue laws are effective at reducing levels of alcohol abuse and related violence and crime are beyond the scope of this post. A recent alcohol limit that seems thoughtful and effective is the restriction of the sale of alcohol during the latter half of sporting events for MLB and NFL games. This alcohol cutoff is a good idea to help curb rowdy crowds and drunk driving.

Today, alcohol is a highly regulated and taxed industry. Although alcohol continues to contribute to social and health issues, the current measures to control this toxic substance are mostly effective at muting the most serious problems that were going unimpeded prior to Prohibition.

A current failed supply side control experiment is the war on marijuana. The war on drugs, initiated by Ronald Reagan in the 1980s, has overwhelmed our jails and unfairly targeted black and Latino Americans. All the while, any high school or college kid can easily find a supplier for weed. The toxicity and social ills related to marijuana can arguably be considered less dangerous than that of its more socially-accepted cousin, alcohol. Additionally, there are exciting medical applications for marijuana-derived products. The nation should follow the lead from states like Colorado and Washington and move to legalize marijuana.

The popularity of Big Pharma prescribed opioid pain medicines have proved to be highly addictive and dangerous. A line can be drawn from legally-prescribed Big Pharma billion-dollar blockbuster drugs to our opioid crisis. Purdue Pharma’s Oxycontin has become synonymous with opioid addiction. Oxycontin has been on the market since 1996 and crossed $1 billion in annual sales in 2001.

In 2016, more than 42,000 Americans died from opioid overdoses — 40% of which involved a prescription painkiller, according to the CDC.

Amazingly and sadly, Oxycontin is STILL being marketed and sold in 2018. The government and FDA should ban, or at a minimum, massively restrict the sale of these products. The opioid crisis and the continued sale of Oxycontin is indicative of a collapse of government oversight. It is no coincidence that Big Pharma, with the highest Congressional lobbying budget of all industries, is able to foist its bad medicine on an unsuspecting public.

Should grandma distrust FDA-regulated, Medicare-subsidized, doctor-prescribed drugs? In the case of opioids, the answer is yes. The flood of money being funneled to legislatures and physicians make it impossible for these supposed protectors of public health to provide a trustworthy and unbiased opinion on these controversial drugs. The drug companies should be taken to task just as Big Tobacco was. Who knew what when? Those answers are sure to be illuminating.

In the case of Oxycontin, Purdue Pharma is being sued by over a dozen states for the aggressive sales and downplaying the negative side-effects and risk of death and addiction related to the product.

Although Oxycontin is the best-known and most-notorious of the opioid drugs, it is hardly the only one being pushed to billion dollar annual sales levels by Big Pharma. There are far more addictive and dangerous opioids that have followed on the heals of the successful sales of Oxycontin.

Just as Big Tobacco figured a way to increase the levels of the addictive active agent nicotine in its products, Big Pharma has done the same for opioids. Unless a class-action lawsuit with the size and scope of the master settlement between the states and Big Tobacco hits Big Pharma, more tragic Oxycontin-like products will continue to plague our society and health care system.

With insurance covering the cost of prescription drugs, a price hike and tax of these bad drugs will not work. The FDA needs to ban or at a minimum suspend drugs once they are proven to be more detrimental than effective. Big Pharma should be held accountable. As reports of unexpected side-effects are submitted, they need to expeditiously investigate the claims and determine if a drug should be suspended. Pharmaceutical companies should be severly and expeditiously penalized for distributing drugs that have been flagged as having dangerous and unanticipated side-effects. The current Big Pharma tactics are disturbingly similar to Big Tobacco’s playbook. Deny, obfuscate, delay, obstruct, and ignore despite clear evidence clearly linking blockbuster drugs to dangerous side-effects or addiction. These tactics have worked so far. By extending the marketable time for problematic drugs, they earn billions of dollars of additional revenues. They are happily paying the slap-on-the-wrist penalties rather than suspend the sales of troubled medications. The weak regulation and penalties are insufficient measures to protect the public. Only a dramatic intensification of regulation, policing and penalties will alter Big Pharma’s current course. Only then should we suspend our skepticism and renew our trust in these profit-hungry companies.

On the demand side, there are three primary initiatives. Limits on advertising, special taxes, and education.

The attempts to curb cigarette consumption utilizes all three approaches.]

In 1967, cigarette advertisements were required to include a public health warning.

In 1970, Richard Nixon’s administration spearheaded legislation to ban the advertising of cigarettes on television and radio.

In 1998, further bans on advertising and marketing prohibited billboard advertising and targeted adverting for the youth market, such as using cartoon characters like Joe Camel and the sale of flavored cigarettes.

Simple enough. Cigarette companies are required to pay taxes for each pack of cigarettes sold.

Primarily in the form of public service announcements educating the public and especially the youth on the dangers and health consequences of smoking.

The legislation making it illegal for cigarette companies to advertise on TV and radio in 1971 was a logical step in the right direction.

Source Data for Chart

The problem is that the ban did little to curb American’s filthy habit. What has impacted smoking rates are the state and local taxes placed on cigarettes. Cigarette taxes began rising more severely in 1983. From that year on, a steady increase in taxes followed. Correspondingly, smoking rates began dropping from that year on. As the inflated-adjusted cost of a pack of cigarettes finally broke the $2 barrier in 1988, the trend towards lower smoking consumption gained momentum. Radical increases in tax rates soon pushed the price of a pack over $3 in 1999 following the landmark 1998 master settlement. In 2007, the prices of a pack broke the $4 threshold. Just two years later in 2009, the $5 level was eclipsed.

The drop in smoking consumption shows a strong correlation to the increased cost of a pack of cigarettes. The epidemic that is cigarette smoking is headed in the right direction. Lung cancer deaths are also headed in the right direction. The cancer trend lines lag the drop in smoking rates, but that is not surprising . A possible reason for this delayed impact is that some lifetime smokers, who started smoking when the prices of cigarettes were low, continue to smoke. Many of these smokers eventually succumb to cancer. The key to getting the lung cancer rates to continue dropping is keeping teens and young adults from starting. If the massive cost of this dangerous product continues to weaken its appeal to younger Americans, this surely will result.

One recent trend that could distort the cancer data is the recent decriminalization and legalization movements for marijuana. As more teens and adults start smoking marijuana, the carcinogenic impact of that product may add to the lung cancer rates outside of cigarette smokers.

The sin tax for cigarette smoking is encouraging. Unlike the ban on TV and radio advertising, price increases on cigarettes are markedly more effective and immediate in reducing consumption rates. The taxes are been used for a number of positive programs including anti-smoking education and advertising. The windfall that states gain from the revenues from cigarette taxes have also been used for various other public service initiatives including K-12 education.

Less consumption, lower cost of health care, and revenues for public funds. This is why I love SIN taxes.

I began this investigation on the impact of regulation on sin products with a mission to see if banning or allowing advertising made a meaningful impact on consumption. There are a lot of ridiculous and irresponsible TV and radio ads for hard liquor after years of a ban on these products being marketed through those channels. On the way to determining if hard liquor sales were increasing due to the advertising ban being lifted, I wss diverted to this anaylsis of the baddest of the bad sin products, cigarettes.

At first blush, the advertising bans on cigarettes appears negligent or at least undetectable. What was not surprising, but more clear than expected, is the correlation between tax levels, corresponding higher cigarette prices, and reduced consumption.

Visualize if the government allowed cigarette companies to sell their products unfettered. No advertising bans. No minimum age requirements. No taxes. Can you imagine how many smokers and how many loved ones would die early due to the harmful health risks of smoking.

Government rightfully gets a bad rap for being ineffficient, but ever once in a while, those ladies and gentlemen in Washington get it right.

With smoking rates continuing to drop, it is time for us to consider applying similar tactics to other products that are linked to health problems. Obesity and diabetes are a growing concern and pose an interesting challenge.

The two primary culprits are soda companies and fast food restaurants. Initiatives to put a sin tax on sodas is a logical starting point. There is no reason American need to consume the massive amounts of sugars that soft drinks contain. Recently soda tax measures in cities like Berkeley, California are proving to have some exciting initial results. As with the cigarette tax, increasing the tax higher will result in reduction in soda consumption. A state-wide soda tax would prove a meaningful data set. Over time, we would be able to see if the corresponding obesity and diabetic rates drop with lower soda consumption.

They say money makes the world go around. In this post, we have seen that indeed is true.

  1. High taxes and corresponding higher prices have greatly reduced the smoking consumption rates in this country.
  2. The restriction on advertising for cigarettes, unlike the higher taxes, did not show a significant impact on smoking consumption.
  3. The illicit sales of alcohol during Prohibition lead to the rise of the Mafia. When demand for a popular illegal product exists, the high profit potential leads enterprising criminals to risk jail time and their lives in a quest for easy money. A further negative effect is these smugglers will murder competitors, law-enforcement and innocent bystanders in order to protect their business.
  4. Big Pharma uses lobbying that corrupts the agencies and politicians who are trusted by the public to protect them. The profits from prescription drugs dwarf dime-bag pot sales. With the health insurance companies subsidizing the high cost of prescription medicine, doctors being wined and dined by company-credit-card-carrying pharmaceutical reps, and the FDA asleep at the wheel, dangerous drugs that should be withdrawn from the market continue to be sold to an unsuspecting public.
  5. Marijuana legalization should look to the sin tax strategy that has successfully curbed cigarette consumption. As our overcrowded jails indicate, the demand for the product is too high to effectively prohibit. Regulation and taxing of this product is a better path forward.

Sin taxes are an effective way to reduce consumption of products that cause harm, but are in demand. The taxes can be used for anti-abuse and public awareness campaigns and to fund public services and works. Thoughtful supply side controls are necessary as well. Restricting the sale to minors and monitoring and limiting distribution channels helps to moderate the use of “sin” products.

Humans are not easy to control. We want what we want. One thing we love as much as our sinful indulgences is money. At a certain cost, we love our money more than our sin products. By applying taxes judiciously, we can allow access to these products, while reducing demand. There are some products that warrant complete prohibition, as the danger and consequences are too high. The fact is high-demand products will find their way to customers regardless of prohibition and policing. In many cases, a thoughtful regulation of the product coupled with a high tax can achieve the most effective policy. In this way, we can enjoy our sins, but only at a premium cost.

CEO & Founder. Gogocater.