To fill budget gaps, several state legislatures have proposed increasing existing taxes on tobacco and alcohol products. In addition, some states (as well as the federal government) are considering the enactment of new “sin taxes,” for example taxes on high-sugar drinks and internet pornography. This Article examines many of the traditional arguments for and against sin taxes. It then focuses on an argument that has previously received little attention—the conflict of interest created by a state’s dependence on sin tax revenues. When states become dependent on sin tax revenues to fund essential government services, they develop an interest in maintaining sales of the “sinful” product. Consequently, the states’ financial interest may conflict with the interest in protecting their citizens’ health.
The Article examines this conflict of interest in the context of the states’ dependence on tobacco revenues. In particular, the Article explains how the $200 billion Master Settlement Agreement between the states and the major tobacco manufacturers aligns the states’ and the tobacco companies’ financial interests. The Article then considers two alternatives that may break, or at least mitigate, the alignment of interest between the states and the sellers of harmful, taxed products: earmarking and securitization. By earmarking or securitizing sin tax revenues, states decouple their financial interests from the interests of companies selling the “sinful” product. The Article concludes that unless states take action to address the conflict of interest that arises as a result of their dependence on sin tax revenues, the states themselves may become the “sinners” by sacrificing their citizens’ health for much-needed revenue.