10.7 Sumptuary Excise Taxes (Sin Taxes)
Discourages excess consumption of items thought to be unhealthy or unsafe for consumers and/or the public
- Most common: Taxes on tobacco and alcohol
Inelastic demand (in general)
Tax Foundation: How Hard Do Distilled Spirits Taxes Bite in Your State?
Benefit-based excise taxes are charges associated with a public good, designed to finance and maintain that good. They essentially represent the price paid for access to or usage of a public service. A common example is fuel taxes, which fund the Highway Trust Fund through federal gasoline and diesel taxes. In this system, the more an individual uses the public good (in this case, the highways), the more tax revenue is generated. Fuel taxes also offer a cost-efficient means of administration and collection compared to alternatives like tolls.
However, there are issues with fuel taxes. These taxes are often set at a specific dollar amount per gallon and are not indexed to inflation, which can erode their value over time and reduce their effectiveness as a funding mechanism.
Regulatory or environmental excises aim to internalize the externalities imposed on society, such as pollution. By imposing these taxes, governments seek to raise awareness among buyers and sellers of the social costs associated with certain behaviors or goods. An example of this is the gas guzzler tax, which discourages the purchase of fuel-inefficient vehicles. These taxes can also promote the improvement of resource-use efficiency, encouraging more environmentally sustainable practices.