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Research & Commentary: States Shouldn’t Depend on Unreliable Sin Taxes

September 9, 2015

States across the nation have increasingly looked to sin taxes on tobacco, alcohol, and gaming to fix budget gaps. Governing magazine recently published an article reporting states have become increasingly reliant on sin taxes.

two tumblers with liquor and a lit cigarrette

States across the nation have increasingly looked to sin taxes on tobacco, alcohol, and gaming to fix budget gaps. Governing magazine recently published an article reporting states have become increasingly reliant on sin taxes. According to the National Association of State Budget Officers, between 2000 and 2015, states enacted a total of 111 tax increases on tobacco products and another 23 on alcohol. In 2014 alone, states collected around $32 billion in tobacco, alcohol, and gambling taxes.

The two primary motivations legislators have for implementing and raising sin taxes are the desire to combat what they deem unhealthy or immoral behavior and the opportunity to create or expand a tax revenue stream. Governing found Delaware, Nevada, New Hampshire, Rhode Island, and West Virginia rely the most on sin tax revenues as a percentage of total state tax revenues. 

Relying on sin taxes has proven to be a poor policy choice. 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 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 a 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, states should focus on tax reforms that lower rates, put dollars back into the pockets of taxpayers, and encourage government efficiency by placing reasonable limits on spending.

The following documents examine sin taxes in greater detail.

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. 

States Profiting the Most from Sin
http://247wallst.com/special-report/2013/08/16/states-profiting-the-most-from-sin/
Using data from the Census Bureau and the American Gaming Association, Michael B. Sauter, Alexander E. M. Hess, and Thomas C. Frohlich of 24/7 Wall St. identify the states where the largest percentage of revenue came in the form of proceeds from alcohol, tobacco, and casino taxes, lotteries, and state-regulated liquor stores.

States Turn to Smokers for Band-Aid Budget Fixes
http://www.governing.com/topics/finance/gov-sin-taxes-states-cigarette.html
Mike Maciag of Governing reports states are increasingly resorting to sin tax hikes to help fill budget gaps. “In the long term, cigarette taxes represent a less-than-ideal revenue source, because the money they bring in is gradually declining,” Maciag said.

The Dirty Dozen: 12 States That Bet Big on Sin
http://www.bloomberg.com/money-gallery/2013-06-26/the-dirty-dozen-12-states-that-bet-big-on-sin.html#slide12
Nikhil Hutheesing of Bloomberg News examines the dozen states with the greatest percentage of total tax revenue derived from “sin.” Sin taxes in this article include tax revenue from tobacco, alcohol, and pari-mutuel betting, using data from the State Government Tax Collections survey produced by the U.S. Census Bureau. 

Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-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.” 

Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
http://heartland.org/policy-documents/research-commentary-best-and-worst-ways-eliminate-budget-deficit
Heartland Institute Government Relations Director John Nothdurft identifies the most and least effective ways states can trim their budget deficits. 

Sin Taxes: Size, Growth, and Creation of the Sindustry
http://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-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 lower-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
http://heartland.org/policy-documents/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 wrote. 

Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
http://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-raise-tobacco-taxes
Heartland Institute Government Relations Director John Nothdurft contends targeted tax increases push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned with the public health effects of tobacco should encourage the use of readily available smoking cessation products and services instead of supporting bad tax policy. 

Sin Taxes: When the State Becomes the Sinner
https://www.heartland.org/policy-documents/sin-taxes-when-state-becomes-sinner
Andrew J. Haile uses the Master Settlement Agreement between the states and major tobacco companies to illustrate the moral hazard created when states become dependent on sin tax revenues. Haile also draws out lessons from states’ experiences with taxing tobacco products to identify problems to consider as state legislatures weigh whether to enact new sin taxes. 

The Political Economy of Excise Taxation: Some Ethical and Legal Issues
https://www.heartland.org/policy-documents/political-economy-excise-taxation-some-ethical-and-legal-issues
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 at https://www.heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.

Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR