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Lately I’ve been thinking about the many ways by which members of the public transfer funds to government and the many reasons for which such transfers are made. After all, we’re still in the “season of giving.”[i]

Voluntary Payments

In some cases, the transfer is made voluntarily.

A business owner makes a payment to a local government[ii] in exchange for obtaining the government’s consent to a particular project – a classic quid pro quo. For example, a developer agrees to dedicate land for a park; they grant a restrictive covenant on real property abutting land on which the developer plans to construct residences provided the developer can obtain the government’s zoning approval.[iii] 

In a very few instances, an individual will contribute property to a government with respect to which the individual will be entitled to claim a charitable contribution deduction if the contribution is made exclusively for public purposes, with no expectation of receiving anything in return.[iv]

Much more frequently, individuals will purchase government bonds and other securities, thereby making an interest-bearing loan to the government.

Involuntary Payments

In most cases, however, an individual’s transfer of funds to the government is made involuntarily.

As discussed in last week’s post,[v] members of a community will pay taxes in exchange for the services provided by the government having jurisdiction over that community – these taxes are the price one pays for the privilege of residing, owning property, or doing business in the community.

Thus, depending upon the community, a member thereof may be required to pay income, sales, property, transfer, employment, and other taxes to the local government to finance the activities in which that government is generally engaged or the services that it provides including, for example, police and fire departments, schools and libraries, public works and maintenance such as bridges, roads, and parks, public transportation, courts and prisons, hospitals and ambulance services, social welfare programs, unemployment insurance, and other programs and services.

The individual is required to pay these taxes without regard to whether the taxpayer can identify a specific instance in which they have directly benefited from a particular government activity or service.[vi]

Conversely, an individual may be compelled to make a payment to the government if the individual has engaged in activities that the public has determined are unlawful or otherwise detrimental to the community[vii] – semantics aside, these payments are referred to as fines.[viii] They are punitive in nature and, if they are steep enough, they may succeed in preventing the individual from engaging in the same activity in the future.

“Voluntary” Taxes?

Certain taxes are sometimes characterized as “voluntary.” Is there something intrinsically oxymoronic about the notion of a voluntary tax? Or is it a question of perspective?

Such taxes are knowingly paid by those individuals who affirmatively choose to engage in a legally permissible activity, or to purchase a legally available product, with respect to which the tax is imposed.

These taxes are to be distinguished from the tolls that are “voluntarily” paid by individuals who choose travel over certain bridges or on certain roads.[ix] They are also different from the general sales taxes that are imposed with respect to those consumer products and services that an individual chooses to purchase.

Tolls and sales taxes may be described as “consumption” taxes that are inherently broad-based and imposed for the purpose of raising revenue.[x]

However, the voluntary taxes to which I am referring are not typically utilized for the purpose of collecting revenue. Instead, they more closely resemble a fine, at least conceptually, because they are intended to dissuade an individual from engaging in what society has determined is less than “optimal” behavior.

For example, so-called “sin taxes” are a form of excise tax that, at least in theory, seek to make a specific product, like alcohol or tobacco, so expensive that the consumer cannot afford it and consequently will forego its purchase and consumption.

In turn, the revenue generated by sin taxes is often dedicated to a particular government program that is usually targeted at redressing the adverse consequences experienced both by individuals who previously engaged in the activity or used the product in question, as well as by those who continue to do so.

No Longer a Sin

Which brings us to the existential question: what happens when a product or activity is no longer “sinful” but continues to be taxed as if it were? Stated differently, does the erstwhile sin tax become a consumption tax that is imposed as a revenue raiser?


Let’s consider New York’s recently enacted taxes on (a) the sale of recreational cannabis, which was legalized in March of 2021,[xi] and (b) online sports betting, which was launched in January of 2022, plus (c) one long-standing voluntary “tax” that has only rarely been characterized as such – the Lottery.

Former Governor Cuomo’s reasoning for legalizing recreational cannabis in New York was illuminating. During one interview, the then governor explained that “cash-strapped New York” was “ripe” for the picking when it came to legalizing marijuana for public sale and distribution.[xii] 

When asked about New Jersey’s successful referendum permitting the sale and recreational use of cannabis, Cuomo responded that “the question becomes about the money and the distribution and the power.” He added, “I think this year (2021) it is ripe, because the state is going to be desperate for funding.” 

Cuomo then stated that “the pressure is going to be on” the legislature in Albany to legalize cannabis and to reap the financial benefits of doing so through state taxes and license fees. In fact, the state hopes to clear about $1.25 billion over the next six years.

Online Gambling

Let’s compare New York’s approach to online sports gambling. A few months after the state legalized mobile sports betting, the State Gaming Commission endorsed the approval of long-term licenses for certain gambling companies.

“The recommendation,” the Commission stated, “comes after years of delays as New York’s neighbors have raked in buckets on their legalized gambling operations. And New York has missed out on that revenue in more ways than one: it’s estimated that 20% of New Jersey’s sports gamblers are New Yorkers hopping the Hudson River.”[xiii]

I guess the Commission must have been onto something because, notwithstanding a whopping 51 percent tax on gross gambling revenues,[xiv] New York has turned into the mother of all bookmaking markets.[xv] In fact, the state’s online gambling program has been so successful that Governor Hochul has made noise about expanding brick-and-mortar casinos.

The Lottery

New York Lottery claims to be the largest and most profitable lottery in the country. Indeed, according to its website, the Lottery contributes billions of dollars annually help fund education in the Empire State.

These folks are pros. For example, the Lottery offers subscriptions to the gambling public “so you will never miss a high jackpot.” What’s more, it offers free interpretation services, thereby removing one’s limited proficiency in English as an obstacle to gambling away one’s money.

But have no fear. The Lottery’s Responsible Gaming Program is dedicated to providing members of the public with the information they need to make educated decisions about the “product” they are buying.

That said, it appears that “state lotteries around the country are supported in large part by people who are least able to afford it.”[xvi] 

Where’s It Going?

According to the governor’s office, the tax revenue from online sports wagering is to be invested in elementary and secondary education and grants for youth sports programming, along with problem gambling prevention, treatment, and recovery services.

Although it remains to be seen whether cannabis sales will turn into the cash cow that Albany envisions, Hochul’s administration has announced that the tax dollars collected from sales of cannabis will be slated for education, community reinvestment, and drug treatment.[xvii]

Lottery revenue, as most of us know, is distributed to local school districts.

History Repeated?

Although it remains to be seen just how harmful and/or successful the legalization and taxation of online gambling and recreational cannabis will ultimately be, our experience with certain existing excise taxes may be instructive.

Once upon a time, the notion of imposing a tax on the sale or use of cannabis would have elicited comparisons to the state’s tax on the sale of cigarettes, which is currently set at $4.35 per package of 20 cigarettes (add another $1.50 in the City), or its tax on alcoholic beverages (the rate varies according to the drink).

The cigarette tax is characterized as an excise tax, meaning the imposition of the tax is intended, at least ostensibly, to dissuade individuals from purchasing cigarettes and, thereby, to help them quit smoking. In addition, the tax proceeds collected from the sale of cigarettes are directed toward anti-tobacco and cessation programs.

However, query how successful the cigarette tax has been in curbing smoking. From an economic perspective, the idea that increasing the price to the point of making it “too expensive” to purchase cigarettes misses the mark.

It’s one thing to increase the price of pizza or cheeseburgers – heaven forbid that such a calamity should ever befall us – to the point where demand falls off precipitously; the so-called “demand curve” for such delicacies[xviii] is elastic (at least for most of us).

It’s another thing to think that increasing the price of addictive substances or addictive behaviors, for which the demand curve is by definition relatively inelastic, will have the same effect – such thinking is likely to fail.

Instead, isn’t it more likely that consumers of such “products” will seek out less expensive alternatives, even from illegal sources? In fact, New York’s high tax on cigarettes has created a thriving black market.[xix]

What can New York’s taxing authority expect from the sale of cannabis when the state’s “legal cannabis will be taxed twice – a potency levy on distributors on top of a 13% retail tax that could push the effective rate to as high as 50% or more on edibles”?[xx]

In the Village, Washington Square Park has already turned into what has been described as “an open-air bazaar of illegal cannabis sales.”[xxi]

Moreover, if California’s experience has taught us anything, legal cannabis businesses will be hard-pressed to survive in a regulated and high-tax environment in the face of competition from an already established, fairly sophisticated, and less expensive illegal market.

As for gambling, “[o]f course, . . .the illegal sports betting market has been in place and thriving in the U.S. for decades, despite the fact that it is yes, illegal.” Still, some analysts believe that “the legal wagering market could well grow to at least $55 billion in the U.S. alone by the end of this decade. And that figure could well be a conservative projection — a very conservative projection — given the burgeoning interest in both sports and sports betting among Americans.”[xxii]

Thanks for Your Voluntary Payment of Tax

Assuming that New York’s experiment with taxing cannabis sales and online gambling somehow succeeds, to whom would the “credit” for the success likely be attributed? Stated differently, what is the demographic makeup of the individuals who are likely to use cannabis products or who will gamble online?

Turns out, by and large, it’s some of the same folks who have been wholeheartedly participating in New York’s Lottery for years – young, male, Black, and Native American individuals and individuals with low educational attainment and income are more likely to engage in higher frequency cannabis use.[xxiii]

Some of these demographic characteristics are also reflected in the consumption of cigarettes. Thus, individuals with low educational attainment and income were more likely to smoke cigarettes, as are individuals with disabilities.[xxiv]

Men are more likely than women (24% vs. 15%) to say they have bet on sports in some form in the past year, as are adults under the age of 50 when compared with those 50 and older (22% vs. 17%). There are also differences by race and ethnicity: Black (27%) and Hispanic adults (24%) are more likely than White (18%) and Asian American adults (10%) to report doing so. There are no significant differences in self-reported sports betting by educational attainment or household income level.[xxv]

Based on the foregoing, it appears that legalizing what was previously a “sinful” product or activity for the purpose of taxing such product or activity will not eliminate the unregulated and “untaxed” sale thereof.

Moreover, to the extent taxes are collected from such activities, such taxes will be borne by those who are least able to afford them.

What gives?

Happy New Year.

[i] Or should I say, “the season of returning and/or exchanging for something else”?

[ii] As distinguished from a political contribution to an elected official’s campaign treasury.

[iii] The quid pro quo defeats the otherwise available deduction under IRC Sec. 170(h) – a basically, a so-called conservation easement.

[iv] IRC Sec. 170(c)(1).

If the grant is in the form of a conservation easement, the deduction must account for (and be reduced by) any resulting increase in value realized by other property owned by the individual. For example, assume an individual owns two adjacent waterfront lots that may be developed as of right. The owner grants a conservation easement on one of the lots such that it cannot be developed in the future. The value of the restricted lot decreases but the value of the owner’s other lot may increase as a result of the restriction.


[vi] Hopefully, one will never need the assistance of the police or fire department, but it’s good to know they are there. In some communities, residents who do not have children or who send their children to private schools argue that their property taxes – which are often earmarked to fund local public education – should be reduced because they do not receive any benefit therefrom. For better or worse, however, where one stands on an issue will often depend upon where one sits.

[vii] For example, traffic violations.  

[viii] Old tax joke: a tax is a fine for doing well, and a fine is a tax for doing wrong. I’m here all week.

[ix] How voluntary is a toll, from a practical perspective? It isn’t. It’s also far from progressive – how does Albany feel about that?

[x] The sales tax base varies from state to state. Many believe that the base needs to be expanded to cover more services in light of our economy having shifted from one that is based on manufacturing to one that is based on services.

[xi] New York issued 36 licenses for the retail sale of cannabis products in November of 2022. The state plans to issue 175 licenses in all.



[xiv] Bets received minus winnings paid.


[xvi] According to this study, lotteries are found “in 45 states plus the District of Columbia. . . It is big money. In 2020 – the latest years for which we had aggregated figures – something like 82 billion dollars were spent on ticket sales for lotteries.” 

[xvii] Of course, there’s the argument that the legalization will benefit “justice-involved” individuals. Recall that 175 licenses will be issued – how many” justice-involved” individuals will these 175 licenses benefit? Then again, if the program fails for economic reasons – witness California’s troubles – so much for “justice.”

[xviii] Don’t yuck my yum.

[xix] .