Gen Z and millennials are living clean, and apparently it’s not good for state coffers.
In March, Bloomberg reported that the U.K. government has missed out on billions of pounds in revenue from alcohol and tobacco sin taxes over the years because young Brits are choosing to smoke and imbibe less than previous generations.
The United Kingdom isn’t the only country facing this problem — Japan is too. As I recently wrote, Japan has been struggling with declining alcohol tax receipts for years. Its liquor excise tax is an important revenue maker but has been declining for 30 years, and the drop-off was especially significant in 2020, partially because of the COVID-19 pandemic.
The question is, how should policymakers respond?
Japan responded with a creative contest asking young people to submit ideas on how the country can encourage alcohol consumption.
U.K. lawmakers have not offered any suggestions, but Bloomberg wrote that the lost revenue will put “upward pressure” on the United Kingdom’s income tax. In the meantime, U.K. policymakers are weighing their options. At the beginning of April, the House of Commons published a nearly 100-page research briefing on the history and condition of the country’s taxation of alcohol.
Some attribute this global teetotaling trend to COVID-19 lockdowns, but it actually appears to be part of a broader cultural and generational shift that is unlikely to reverse anytime soon. This may be especially true in light of recent research indicating that even moderate drinking is not good for health. Governments would be wise to prepare for a decline in alcohol tax receipts and think about other ways to make up for lost revenue.
This segues into another issue: the reliability of sin taxes. Sin taxes are often criticized as unstable forms of revenue. If they are successful, they will deter the targeted behavior, and tax receipts will decline. Or they might push consumer activity to the black market, also causing tax receipts to decline. But let’s focus on the first scenario — that sin taxes are inefficient because they may become too effective for their own good.
Roll of dollar banknotes in wine glass.
That may not be an entirely fair way of framing or evaluating sin taxes. Yes, it is true that tax revenue will fall if a sin tax rate is high enough to deter consumer activity, but this is not necessarily a bad thing. There are public health advantages to deterring heavy drinking and smoking, and a sin tax is a success if it can reduce that kind of behavior. If we look at sin taxation through that lens, then it does not necessarily need to be a permanent tax measure.
Of course, from an administrative standpoint, it is ideal if a tax measure can provide a long-standing and consistent revenue stream. But the reality is that national laws change, including national tax laws. Also, sin taxes are based on cultural behavior, which can change across generations. In this light, it makes sense that sin taxes may not have as much longevity as other taxes.
The cultural aspect of sin taxation also means that legislators likely won’t lack for a laundry list of social behaviors they’d like to modify through taxation.
In our current global environment, I think legislators should use this moment as an opportunity to seriously shift their attention to climate-related sin taxes. Those could include measures like taxes on meat (a wildly divisive idea, but one worth considering). Or, as mentioned in a recent New York Times
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