Bruce F. Davie
Department of the Treasury
Updated by
Dennis Zimmerman
Congressional Budget Office
Excise taxes intended to discourage the consumption of specific commodities or services.
The term sumptuary taxation has gone out of fashion. An earlier generation of writers used the term to categorize taxes imposed for moral or religious reasons. Contemporary economists would describe a tax intended to discourage consumption of a specific commodity as adjusting for a negative externality. Politicians and journalists might use the term "sin taxes."
Excise taxes have been and are widely used by governments to discourage consumption of specific commodities; taxes on alcoholic beverages and tobacco products are the obvious examples. Using the old-fashioned term "sumptuary tax" helps to clarify thinking about excise taxes of this sort. The need for clarity is illustrated by the literature regarding cigarette taxes and smoking. Those who view tobacco taxes as instruments for adjusting for externalities are interested in measuring the negative externalities and reaching a conclusion about whether the tax, as a policy instrument for increasing the price by an amount that corresponds to the measured externalities, is too high, too low, or about right. Those who view cigarette taxes from a sumptuary stance argue for taxes above the externality-adjusting level because they regard protection of every individual's health a public policy obligation. In this view, it is a moral imperative to reduce consumption below what would occur when consumers are fully aware of the risks of smoking and cigarette prices include measured externalities.
Both advocates of externality-adjusting excise taxes and advocates of sumptuary taxes would agree that the revenue generated by the tax is not a primary objective. Similarly, they would agree that the distribution of either tax among taxpayers classified by income or consumption levels is largely irrelevant. For both, the object of the tax is to get the gross-of-tax price "right."
Sumptuary taxes set "too high" verge upon prohibition through the tax system rather than by regulation. Because the social costs of prohibition can be significant-for example, the costs of controlling smuggling and illicit domestic production and distribution-a sumptuary tax rate that is in some sense optimal is not a rate that minimizes consumption. Clearly, sumptuary taxation involves issues that go well beyond traditional tax analysis.
The United States has a long history of sumptuary taxation of alcoholic beverages and tobacco products mixed with revenue-raising objectives. The first domestic tax, enacted by the United States in 1791, was on distilled spirits at rates ranging from 7 to 18 cents per gallon depending on the alcohol content, or proof, of the liquor, and imposed on the distiller. The first Secretary of the Treasury, Alexander Hamilton, sought a revenue source not dependent on foreign trade. Sumptuary motives were also involved. As Hamilton put it, "The consumption of ardent spirits particularly, no doubt very much on account of their cheapness, is carried on to an extreme, which is truely to be regretted, as well in regard to the health and morals, as to the economy of the community (quoted in Forsythe 1977, 40). The tax was resisted in western Pennsylvania and other areas where whiskey was used as a medium of exchange. In 1794, troops had to be called out to put down the "Whiskey Rebellion." The military operation was successful in establishing the power of the new government to collect taxes, but the tax continued to be unpopular. Soon after the Jeffersonians took power, the whiskey tax was repealed. It was reenacted briefly during the War of 1812 and then not again until the Civil War, primarily as a revenue-raising measure. At the time, only a few members of Congress argued for the tax on sumptuary grounds. During the 1860s taxes were also imposed on beer, tobacco products, and wine, but again, sumptuary objectives were secondary to revenue. Taxes on alcoholic beverages and tobacco products have been part of the federal taxes ever since the Civil War. The sumptuary character of these taxes, and of similar state and local taxes, seems to form a substantial part of their continuing public acceptance.
The 10 percent tax on wagers on sporting events, elections, and contests enacted in 1951 might be regarded as a sumptuary tax. Its intent was to aid law enforcement efforts aimed at illegal bookmaking. The rate was reduced to 2 percent in 1974 and, in the case of legal wagers such as sports betting in Nevada, to 0.25 percent in 1982. Exemptions are provided for state lotteries, state-sanctioned horse races, and similar events. Given the low rate on legal wagers and the broad exemptions, the tax on wagers seems to have a role only in enforcement of laws against illegal bookmaking and thus is not truly sumptuary.
Sumptuary taxes present special administrative problems because they are typically high relative to the value of the product, increasing the payoff for successful tax evasion. The enforcement problem is further complicated by the typical rules allowing the product to be exported or used for a purpose other than human consumption on a tax-free basis. For these reasons, sumptuary taxes involve systems of inspection and control not typical of other excise taxes.
Structuring a tax to accomplish a sumptuary objective also presents difficulties. Instead of an ad valorem tax, taxes on liquor and tobacco are usually in rem taxes based on volume and weight, respectively. For example, the U.S. tax on distilled spirits applicable in 2004 was $13.50 per proof gallon; wine was taxed at rates ranging from $1.07 to $3.15 per gallon, depending on alcohol content, with wines having an alcohol content of more than 24 percent taxed like distilled spirits; beer was taxed at a rate of $18 per 31-gallon barrel; and champagne at $3.40 per gallon. In terms of alcohol content, the distilled spirits tax results in a tax of about 21 cents per ounce, the beer tax about 10 cents per ounce, and the wine tax about 8 cents per ounce. These differences seem to reflect political judgments about the relative degree to which sumptuary taxes should be imposed on different classes of alcoholic beverages. Because these taxes are not structured solely on alcohol content, definitional problems continually emerge as new products come on the market. Inflation has the effect of eroding the real value of in rem taxes. Despite ad hoc increases in tax rates on alcohol and tobacco, in real terms U.S. rates were generally lower in 2004 than in 1951.
Additional readings
Congressional Budget Office. Federal Taxation of Tobacco, Alcoholic Beverages, and Motor Fuels. Washington, D.C.: Congressional Budget Office, June 1990.
Cook, Phillip J., and Michael Moore. "This Tax's for You: The Case for Higher Beer Taxes." National Tax Journal 47, no. 3 (September 1994): 559-74.
DeCicca, Philip, Donald Kenkel, and Alan Mathios. "Putting Out the Fires: Will Higher Taxes Reduce the Onset of Youth Smoking?" Journal of Political Economy 110, no. 1 (February 2002): 144-69.
Forsythe, Dall W. Taxation and Political Change in the Young Nation, 1781-1833. New York: Columbia University Press, 1977.
Gravelle, Jane, and Dennis Zimmerman. "Cigarette Taxes to Fund Health Care Reform." National Tax Journal 47, no. 3 (September 1994): 575-90.
Smith, Harry Edwin. The United States Federal Internal Tax History from 1861 to 1871. Boston: Houghton Mifflin, 1914.
Viscusi, W. Kip. Smoking: Making the Risky Decision. New York: Oxford University Press, 1992.
Cross-references: excess burden; luxury taxes; retail sales tax, national; severance tax, state; tobacco taxes.
