Taxes are often used to affect people’s behavior as well as to raise revenue for public works. We see it in income tax, where things like marrying, having children, and giving to charity are encouraged by tax deductions. We also see it in extra taxes placed on certain purchases, intended to cover the costs of those purchases. Sumptuary taxes, excise taxes, or so-called sin taxes, like the extra tax on cigarettes which is used for anti-smoking campaigns, or gas taxes which are used to pay for roads, are examples of these taxes. Sales taxes often get lumped together with sumptuary or sin taxes. The difference in any given case is often unclear, and in the minds — and experience — of most consumers, there’s no difference.
Do they work? If you want people to stop buying something, tax it. That’s been the case with the 2009 tobacco tax, the tax on junk food in the Navajo Nation, and the proposed soda tax in San Fransisco. The idea is that if someone wants to consume something bad for them, they have to pay the price for it (doubly it would seem). But if we want to determine the efficacy of these taxes, we have to answer two questions. First, does taxing these items actually discourage spending? It can be very difficult to determine. Forbes shared numbers that seemed to make a very strong case for a “yes” answer to this question in 2012, reporting that there were three million fewer smokers at that time than there had been before President Obama raised the cigarette tax sharply when he first took office. A rise in taxes takes place, and a drop in the use of the taxed product takes place, and it seems very logical to connect the two facts. The Forbes author is not so sure, because when she asked former smokers, few said they had stopped because of the tax.
The sample size is of course very different: 3,000,000 former smokers following the tax hike compared with a handful of former smokers the writer asked. However, a sin tax typically is levied on items that people generally agree are not good for us. A smoker who feels a bit of a pinch when paying for cigarettes might also have been embarrassed to be the only smoker in his group or worried about health effects. The extra cost might just have been the final straw. Brick-and-mortar merchants across the country are convinced that fear of sales tax makes them lose out on sales, and there is some evidence that they may be right. It’s always hard to prove a claim that involves understanding human motivations, but it looks as though taxation does affect spending.
The second half of the equation in many cases is that the money collected by special taxes of this kind is intended to offset the costs associated with the behavior. So the second half of deciding whether it works requires us to consider the amount of money raised and how it’s used. Are the taxes enough to cover the costs of treating diseases and illnesses related to unhealthy foods or other lifestyle choices? Again, it’s hard to determine the answer. Often, the tax revenue doesn’t go directly to cover the costs associated with the item. When it’s an added sales tax, the funds are not channeled directly to the cause. When it’s an excise tax, it’s very common for unrelated items to be tucked into the bills so that the revenues are spread across a number of activities apart from the road repairs or diabetes counseling they were initially intended to fund. So the taxes might not completely fulfill their purpose, but they do seem to affect consumer behavior. For businesses, they just add another layer of complexity to tax filing. Let us help you simplify your sales and use tax compliance.