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Research & Commentary: Sin Taxes: An Ineffective Cure for New Mexico’s Budget Woes

September 22, 2016

In this Research & Commentary, Matthew Glans discusses sin taxes and how they distort markets, reduce economic competitiveness, and encourage unsustainable increases in government spending while placing an excessive burden on lower-income taxpayers.

According to the Albuquerque Journal, New Mexico has over-budgeted by more than $1 billion over the past two budget years. The shortfalls were caused in part by lower oil and gasoline tax revenue and overspending. Dan Boyd, a writer for the Journal, also notes the state has already exhausted its main cash reserves and is now facing a projected shortfall of $458 million for the current budget year and a $131 million deficit for the fiscal year that ended in June.

As a result of the growing deficit, several groups across New Mexico have begun to call for increases in the state’s “sin” taxes on tobacco and alcohol to fix the budget gap. The first proposal, which was offered by a group called Alcohol Taxes Save Lives and Money (ATSLM), calls for an alcohol excise tax increase of 25 cents per drink. ATSLM says the tax increase would be used to help alleviate budget problems and offset drinking-related costs imposed on the state.

The American Cancer Society’s Cancer Action Network has called for a tax increase of its own. It wants the legislature to create a $1-per-pack tobacco tax increase, moving the current tax from $1.66 to $2.66. The tax would also include an increased tax rate for other tobacco products, including cigars and smokeless-tobacco products. The group predicts the tax increase could generate about $33 million annually.

New Mexico has become increasingly reliant on sin taxes to cover its budget imbalances. According to Governing Magazine, sin taxes in New Mexico – including taxes on alcohol, tobacco and gambling – amounted to about $193 million in the 2014 budget year, or 3.4 percent of total tax revenues. As recently as 2010, New Mexico enacted a new law that increased the state’s cigarette tax by 75 cents per pack.

Despite the many promises made by sin tax proponents, relying on sin taxes has proven to be a poor policy choice for New Mexico and other states.

Sin taxes are regressive, notoriously unreliable, and are often used to prop up unsustainable spending increases. Most revenue estimates for new and increased sin taxes are never met. The National Taxpayers Union Foundation has found tobacco tax collections failed to meet initial revenue targets in 72 out of 101 recent tax increases.  Sin taxes also have a significant detrimental effect on local small businesses. Retailers and wholesalers experience decreased sales because consumers avoid the tax vote with their feet and buy products outside the state, city, or county imposing the tax. 

Lawmakers and government officials tend to shift sin taxes to other products when revenues run short of expectations. In addition to taxes on tobacco and alcohol, governments are beginning to expand sin taxes to other items not typically thought of as detrimental, such as soda pop, plastic bags, and tanning beds. Although sin taxes do sometimes result in increased revenue over the short term, they often lead to an even greater increase in expenditures, which often cannot be supported by the tax over the long term, thereby creating budget shortfalls. High sin taxes by design aim to discourage certain product consumption or actions, but they also encourage smuggling and other illegal activities. 

Sin taxes unduly burden moderate- and lower-income individuals. Tobacco taxes provide a good example of this phenomenon. According to the Bureau of Labor Statistics, consumer households earning less than $150,000 per year make 95.8 percent of tobacco expenditures

Sin taxes distort markets, reduce economic competitiveness, and encourage unsustainable increases in government spending while placing an excessive burden on lower-income taxpayers. Instead of creating and increasing discriminatory taxes, New Mexico legislators should focus on encouraging government efficiency, pension reform, and placing reasonable limits on spending.

The following documents examine sin taxes in greater detail.
 

The Wages of Sin Taxes
https://www.heartland.org/publications-resources/publications/the-wages-of-sin-taxes
In this paper by Christopher Snowdon of the Adam Smith Institute, the author examines the government’s decision to increase taxes on cigarettes and alcohol and to introduce minimum alcohol pricing in 2016. “The report argues that ‘sin taxes’ (taxes on commodities seen as harmful to health) are ineffective in reducing consumption and are not necessary for recouping lost revenue. The taxes are highly regressive and force the poor to pay for the government’s mishandling of public finances,” wrote Snowdon.

Regressive Effects: Causes and Consequences of Selective Consumption Taxation
https://www.heartland.org/publications-resources/publications/regressive-effects-causes-and-consequences-of-selective-consumption-taxation
In this study authored for the Mercatus Center at George Mason University, Adam Hoffer, Rejeana Gvillo, William F. Shughart II, and Michael D. Thomas examine selective consumption taxes. The authors argue they do little to change individual behavior and are extremely regressive, placing an unnecessary burden on the poor. “The study concludes that selective consumption taxes are both ineffective and regressive, and that improving education and increasing the availability of healthier goods may be better steps than raising taxes on those who can least afford them,” the authors wrote.

Sin Taxes Harm Public Health, Pocketbooks
https://www.heartland.org/news-opinion/news/sin-taxes-harm-public-health-pocketbooks?source=policybot
Jesse Hathaway writes in this article for Budget & Tax News about the ineffectiveness of sin taxes. “Instead of using them as ‘health taxes,’ lawmakers are exploiting sin taxes as ‘stealth taxes’ to boost government revenue through a divide-and-conquer strategy, hitting small groups of people who cannot effectively fight back,” wrote Hathaway.

Ten Principles of State Fiscal Policy
https://www.heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy 
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

Sin Taxes: Size, Growth, and Creation of the Sindustry
https://www.heartland.org/publications-resources/publications/sin-taxes-size-growth-and-creation-of-the-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries.

Taxing Sin
https://www.heartland.org/publications-resources/publications/taxing-sin
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation,” they write. 

The States Most Dependent on Sin Taxes
http://www.governing.com/topics/finance/gov-sin-tax-states-dependency.html
Governing magazine tallied fiscal year 2014 tax revenues states received from taxing alcohol, casinos, tobacco products, or certain kinds of video games. The article outlines the states with the largest share of total tax revenues generated by sin taxes.

The Political Economy of Excise Taxation: Some Ethical and Legal Issues
https://www.heartland.org/publications-resources/publications/the-political-economy-of-excise-taxation-some-ethical-and-legal-issues-1?source=policybot
Excise taxes are used not only to raise revenue but also to alter or punish behavior. In many cases, excise taxes can be called “sin” taxes, because they punish people for politically incorrect behavior, such as smoking or consuming alcoholic beverages. In this article, Robert W. McGee examines the nonrevenue uses of excise taxes and analyzes their propriety from the perspectives of economics, law, and ethics.

The Economics of Sin Taxes
http://www.acton.org/pub/religion-liberty/volume-4-number-2/economics-sin-taxes
James Sadowsky considers sin taxes, how they affect the products they are imposed on, and the public’s recent backlash against such taxes.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

Whether sending an expert to your state to testify or brief your caucus, hosting an event in your state, or simply sending you further information on the topic, Heartland can assist you. If you have any questions or comments, contact Logan Elizabeth Pike, The Heartland Institute’s government relations manager, at lpike@heartland.org or 312/377-4000.

Article Tags
Taxes Government Spending
Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.