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Ohio Gov. Mike DeWine’s final two-year budget proposal, released earlier this month, has caused quite a stir.
The headline many have seen about it over and over again is the changes the budget recommends to taxes — namely proposed increases to taxes on cannabis, cigarettes, and sports betting.
These taxes are often given the pejorative label of “sin taxes” because they cover “vices” that are potentially more palatable to tax than say…income or general sales.
The phrase “sin tax” smells a lot like the rebranding of the “estate tax” as a “death tax.” It’s a way to get at our gut and rankle that libertarian impulse that we as Americans almost all have whether we like it or not. Who is to say what constitutes a “sin” or not? Certainly not the government. Don’t tread on my Marlboros!
The problem with this framing is that it obscures a valuable tool of taxation: to correct social problems.
The typical function that we ascribe to taxes is to raise revenue for operations of government. If that were the only way we could use taxes to a good end, the answer for how to raise taxes is pretty straightforward: cover as many different economic transactions as possible to make taxes as efficient as possible then rebate either cash or services back to low-income households to offset the regression of the system.
The problem with this line of thinking about taxes is that it is both excessively narrow-minded and a century behind the times.
When Teddy Roosevelt instituted the national estate tax, he saw it as a way to promote equality of opportunity. Why should your wealth be a function of your parents’ wealth? An estate tax reduced how much wealth you could receive from your parents, which had an impact on inequality.
At the same time, Economist Arthur Pigou was promoting what later became known as “Pigouvian taxation,” the idea that we can tax economic transactions that lead to “externalities,” or social spillovers that cause harm to others.
This became the theoretical basis for carbon taxes. If we want to reduce the release of carbon into the air, we need to bring the private cost of carbon pollution into line with the social cost of carbon pollution.
This is how taxes on cannabis, cigarettes, and sports gambling work.
A study released by the Federal Reserve Bank of Kansas City last year found state cannabis legalization caused double-digit increases in substance use disorder, chronic homelessness, and criminal justice involvement. Cigarette smoking leads to hundreds of millions of dollars in health care spending and productivity losses every year. Sports betting is causing household fiscal instability and fueling addiction.
Yes, increasing taxes on cannabis, cigarettes, and sports betting does raise some equity concerns. The amazing thing about Pigouvian taxation, though, is that by using the revenue raised you can promote efficiency and equity at the same time by funding programs that support low-income people like child tax credits…just like this current budget does.
You cannot build a state budget on a foundation of Pigouvian taxes — these three taxes will only raise 4% of total tax revenue in DeWine’s FY 2026-2027 budget. But if we can curb social problems and fund programs at the same time, why wouldn’t we?
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