Paying the Price for Vice: The Evolving Landscape of Excise Taxes in America

While excise or vice taxes have long been a part of the American tax landscape related to alcohol and cigarettes, the recent invention of vaping and legalization of marijuana and other substances is changing the landscape.

What Are Excise Taxes?

Excise taxes are taxes on specific types of consumable products such as alcohol or tobacco for one of two reasons. First, as vice taxes in order to raise revenue to cover the costs related to consumption; and second, to deter consumption itself. Unlike other types of consumption taxes such as sales tax, these are specific to certain products.

Do They Change Behavior?

Theoretically, when you increase the price of a product such as alcohol through the addition of excise taxes, demand should go down. While this may be a deterrent and limit demand, excise taxes certainly haven’t proven to be a feasible way to eliminate behaviors. A pack of cigarettes can cost upward of $15 in major cities, but there are still people smoking. It’s a similar situation with drinking and gambling.

It’s All About the Benjamins

While we think of excise taxes as vice taxes today in many respects, the main point isn’t to change behavior – it is to raise revenue. Excise taxes pre-date the United States and were one of the main forms of government funding in America before income tax was created. Alcohol taxation goes back to George Washington’s presidency and incited the infamous Whiskey Rebellions. Cigarette taxes were introduced as a way to pay for the Civil War. In the end, it’s about the money generated as there are easier and more effective ways to regulate behavior.

New Products Equal New Taxes

The legalization of marijuana by states raises the issue of excise taxes on this product. Unlike tobacco, where one of the goals is to decrease consumption, the situation here is more one of legalizing something to raise consumption and generate revenue as a result.

Marijuana taxation is more akin to alcohol in the years following prohibition. In both cases, you have large-scale illegal operations and illicit consumption with the aim of moving them to legitimate status. In this sense, it’s different than other vice taxes. 

Initially, at least, the authorized market will have to operate in parallel with the black market for the same product, limiting the amount of taxes that can be raised when there is still an unregulated and untaxed alternative.

Beyond Marijuana

Aside from marijuana, there are other new products that could be taxed and generate revenue, the most notable being vapor products. While vaping products are not really that new, the market is just growing to a substantial size.

Taxing vaping products is more complicated and problematic. Some consider these products to be just as harmful as cigarettes, while others not so much. There is evidence that nicotine consumed via vaping is less harmful than through smoking cigarettes.

Theoretically then, the government should apply less taxes as a result if the harm and therefore cost to society is less.  The problem with this is that less revenue is raised. As noted before, we come back to the issue that vice taxes are often revenue-raising tools disguised as public safety measures.

Too Successful For Its Own Good

Vice taxes can be too successful, with tobacco as the best example. While people may stop buying cigarettes, they don't stop consuming cigarettes; instead, they buy them elsewhere.

For example, more than 50 percent of cigarettes consumed in New York are purchased out of state. If you push too far, people will react.

Conclusion

Excise and vice taxes are here to stay. While varying arguments can be made that they benefit society by shaping behaviors, it is undeniable that state, local and the federal government are addicted to the revenue generated.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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