Why sin taxes fail as a revenue generating device - FreeEconHelp.com, Learning Economics... Solved!


Why sin taxes fail as a revenue generating device

Today's post will be a random rambling about government's making stupid funny deicisions.  It has been popular recently to increase taxes on cigarettes because of their negative effect on health, and the externality of second hand smoke.  What governments fail to realize is that the law of demand is a LAW, and when they increase the price of these goods less people will buy them.

So what has happened recently in New Mexico is that government programs were created
(in particular health insurance for kids) entirely funded by this new tax on cigarettes.  However, when people actually started smoking less because of the tax (arguably the intent of the law), the revenues plummeted and the program was unable to continue.  Because health insurance for kids was such a popular idea, everyone wanted it to continue so funds were diverted from other programs to keep this going.  The end result is that everyone became responsible for the program through general taxes.

So keep this in mind next time you see a program entirely sponsored by a new tax with alternate motives.  Just because you have extra money today, doesn't mean you should commit to new programs that may cause budget issues in the future.  One of the big reasons the United State's is in the mess they are today is because of their lavish spending during the good times.  Government's created many programs that couldn't easily be stopped.  This was ok when revenues were large, but now in a recession the tax base has shrunk and budgets have dried up.  However the programs and spending still exists, and aren't easily taken care of.

I wish that more thought went into these practices, and continuing programs were only enacted when a reliable source of revenue was identified and secured.  This lack of foresight is one of the many reasons we see the problems that are going on today.  Hopefully this latest cigarette tax debacle will be a lesson to future politicians trying to look for an easy way to raise money.