Sin taxes are a leading indicator of political failure

From New Vice City by Nicole Gelinas.  The subheading is Gotham’s post-pandemic economic-development strategy: gambling and weed.  

Sin taxes are as old as taxing governments.  The argument usually goes along the lines that an otherwise religiously, culturally or legally proscribed activity (such as prostitution, drugs, gambling [casinos or lotteries], alcohol, etc.) will occur anyway.  Better to bring it in from the shadows where it fosters crime.  Given that it will occur anyway, why not use taxes to regulate its cost.  That would provide three benefits: reducing consumption owing to higher cost, improving safety regulations around the activity by making it open, and raising revenue for the State.

The response is also age old.  One response is that it is hypocritical to encourage that which the state wants to discourage.  Another is that it creates moral hazard.  Sin taxes inevitably bring government corruption.  The state which wants to discourage the activity now has a financial stake in increasing the activity.  Relatedly, the state is the beneficiary of the revenues but does not directly bear the brunt of the societal damage of prostitution, drugs, gambling, alcohol, etc.  

One of the earliest and most seductive arguments for legalized gambling is the promise that the proceeds will go to education.  Every dollar gambled will provide a few cents of extra funding to schools.  The first state education lottery came in more than fifty years ago and now 45 states have a state lottery yielding funds to education.  Yes, the state has to pay less on education, but at what cost in legitimacy and in terms of unintended consequences?

Gelinas' article is well researched and linked.  He focuses on drug sales (pot) and gambling as the two key sin taxes and how they twist state governments.

The fundamental point is that sin taxes are almost always a Hail Mary move by states to avoid reigning in their out-of-control spending.  It is a papering over of financial cracks.

But all these sin taxes, all the desperate efforts to find free money for the state, never deliver the benefits that are promised and the costs and damages they bring with them are deep and often irreversible.  

I returned from overseas to boarding school in New Jersey in 1976 and therefore was exposed to the debate about sin taxes as the state of New Jersey tried to decide whether and how to implement gambling casinos in Atlantic City.  They eventually passed the enabling legislation and there was certainly a temporary boom in construction and employment.  But after a decade or two, Atlantic City returned to its steady decline and many of the casinos are gone leaving an air of decline and neglect.

The moral debate about sin taxes will continue ad infinitum.  The arguments about the social and economic impacts are getting clearer as time passes:

The authors caution that “if the economic benefits are short term and small, but the harm to society is long term and potentially irreversible, rather than focusing on the temporary gains, one must weigh the benefits and costs.”

What I was most struck by in Gelinas' piece was the opening paragraph.

In August, New York mayor Eric Adams stood before a banner festooned with cannabis-leaf emblems, making what he billed as a major announcement. “Today, we light up our economy,” enthused the mayor. Referring to recreational pot sales, he continued: “The regulated adult-use cannabis industry is a once-in-a-generation opportunity. . . . Cannabis NYC will plant the seeds for the economy of tomorrow.” Standing with Adams, John Durso of the Retail, Wholesale and Department Store Union promised “good, union jobs.” Jeffrey Garcia of the Latino Cannabis Association predicted “one of the largest generators of wealth in New York at least for the next two decades.” Bertha Lewis of the Black Institute affirmed that “cannabis is an industry and not just a nickel bag.” Deputy mayor for economic development Maria Torres-Springer promised “hundreds of millions in revenue” for the city.

This is extravagant claiming and forecasting.  Given the track record elsewhere, there is little basis for the above enthusiasm.  At best these statements are state propaganda.  

Their absurdity is staggering.  "Cannabis NYC will plant the seeds for the economy of tomorrow."  Who, with any numeracy, commercial nous, or sense of urban development believes that to be true?  "One of the largest generators of wealth in New York at least for the next two decades."?  "Hundreds of millions in revenue?"  These are simply unbelievable and untenable forecasts?  Why are they not being questioned?

Gelinas is of course, but that is not a common mainstream media response.  They are mostly cheerleaders.  Gelinas lays out the research evidence suggesting why none of these boisterous extravagant claims will come to pass.  There is a lot of propaganda for a set of strategies which worsen the conditions of the state (or city).

Indeed, focusing on sin taxes is almost certainly the leading indicator of incapacity among a political leadership.  Sin taxes are only considered when a political class no longer is able to deliver basic civic services reliably and affordably.  Seeking sin taxes is a good sign of urban and state decline in the coming two decades because it is evidence that the political class would rather sacrifice making hard choices to solve real problems and would rather chase the chimera of free money with no consequences.