Could ‘sin taxes’ be raised at the next budget?

In a recent Blog (Isn’t it about time to ditch some taxes?) I speculated that some of the so-called sin taxes could be axed in the drive to simplify our tax system but came to the conclusion that this would probably not happen because of Kier Starmer and Rachel Reeves’s stated position of linking taxes to their mantra of ‘doing the right thing!’,

So, when you link their mantra of ‘doing the right thing!’, to their associated mantra of, ‘not raising taxes on working people’(i.e. income tax, NIC & VAT), you can see why there are growing rumours that raising sin taxes could be their preferred solution to filling ‘Rachel’s Black Hole’.

So, with virtually no realistic alternatives left to bridge the fiscal gap, could increasing the level of taxes on addictive and perhaps, discretionary activities, save the day for Kier Starmer and Rachel Reeves? These areas appear to be some of the only options because of Labour’s unnecessary manifesto commitment to freeze rates of income tax, employee national insurance contributions and VAT.

Sin taxes – points to consider

This area of taxes, which in theory, are intended to influence better behaviour could be raised and justified by putting them onto the moral high ground. The Chancellor could then have genuine scope to raise material amounts of tax without breaching her manifesto promises or hitting every working individual with what is increasingly becoming a blunt weapon.

There is no doubt that many members of the public will be angry at the prospect of much higher taxes on gambling, alcohol and tobacco. However, given that each of these activities is costly to the nation in terms of demands on the NHS and/or social services there is a commonsense logic to effectively taxing activities that other citizens end up paying for.

In the last tax year, taxes on gambling, alcohol and tobacco raised nearly £30bn. If you were to double the tax rate, you would almost certainly be some drop-off in demand, but overall, the savings from lower spending on the NHS and social services would result in a net increase in the government’s finances and improve the lives of those who can no longer afford to become addicted.

Tax on activities that harm the planet

On top of sin taxes, you could well add the range of the public’s activities that have a damaging effect on the planet, such as discretionary and often unnecessary car journeys and our addiction to using plastics, solely based on cost and convenience.

• Fuel duty – This stood at 58.95p per litre in January 2011, followed by a 5p cut in 2022 to 52.95p per litre with the government cancelling planned increases to the duty rate in every subsequent year, which will continue until at least March 2026.

The government is forecast to raise £25 billion from fuel duties in 2025-26, but if the ‘Fuel Price Escalator’, set at 6% above inflation in 1997 by the Gordon Brown, was still in effect the tax would have more than doubled’

• Plastic Packaging Tax (PPT) – This was introduced on April 1st, 2022 and imposes a £223.69 per tonne tax on plastic packaging with less than 30% recycled plastic content, with the aim of reducing plastic waste.

The majority of manufactures seem happy to pay the tax, rather than using one of the available plant-based alternatives which are presently more expensive. These bio-degradable materials are made from plant material like corn, starch, seaweed, sugarcane, tree-pulp, bamboo fibre etc. and often just use agricultural waste. A hike in this tax might not raise a huge amount of additional tax but would result in many companies switching to bio-degradables and help the planet.

• Air-passenger duty (APD) – Fossil fuels are the biggest driver of global warming, so as well as taxing petrol and diesel, it would also make equal sense to raise taxes on jet fuel. There is however a way round this for airlines, as they could mostly fill up outside the UK, but a sharp increase in APD could significantly increase the £28bn collected last year.

Find a new ‘sin’ to tax

My next suggestion is somewhat radical, but hear me out first before dismissing the idea, which is to accept the reality of a widely used product and legalise cannabis and its derivative products.

At present, there is no way to tax a drug that cannot be sold legally. By bringing it within the law, very welcome tax revenues could flow into the Exchequer, following the precedent of what some would argue are the equally potent and potentially even more harmful alcohol and tobacco.

In the USA, a majority of the states have legalised (and taxed!) cannabis and enjoy significant revenue from doing so. As an example, the small state of Oregon, with a population of just over 4 million, raises a whopping £1billion in taxes on cannabis, which would equate to approximately £17billion in the UK.

Accountant’s view

Although I believe that many of my suggestions in today’s Blog do have some legs, I’m realistic enough to accept that Dear Rachel will probably shy away from implementing them in full, but perhaps she will at least consider doing so in part.