Are Sin Taxes Healthy for State Budgets?

Posted by Pew Charitable Trusts on July 30, 2018

Taxes on vices are tempting but unreliable source of revenue

Overview
When Kansas lawmakers found themselves facing a projected $900 million budget shortfall in 2017, then-Governor Sam Brownback (R) proposed tax hikes on cigarettes and liquor, among other measures—which would have been the state’s second cigarette tax increase in three years. But legislators on both sides of the aisle decided the measures, projected to raise $377 million over two years, did not do enough to address the state’s structural budget problems. The Legislature rejected the proposal, instead passing a budget that included over $1 billion in income tax increases directed at improving the state’s longer-term fiscal outlook.1

Although Kansas lawmakers rejected the tax hikes on alcohol and tobacco, their dalliance with the idea—and their passage of the earlier tobacco tax increase—is indicative of the widespread attractiveness of these taxes on specific behaviors. Since 2000, all but nine states have significantly raised tax rates on cigarettes and other tobacco products.2 The median state tax on cigarettes has increased more than fourfold—from 34 cents in 2000 to $1.57 in 2017.3 The circumstances behind the increases vary, but they point to two primary motives: advancing public health by making tobacco use more costly and collecting revenue from those who do not give up the habit.

This is the paradox of sin taxes, the class of taxes that includes tobacco. These extra dollars and cents levied on products and activities considered detrimental to consumers—traditionally tobacco, alcohol, and gambling—are intended to accomplish two contradictory goals: Like all taxes, they generate revenue for the taxing entity, but they also aim to deter the behavior being taxed—which can ultimately negate the first goal.

Indeed, research suggests that higher cigarette prices play a role in curbing smoking.4 A reduction in smoking is good for public health, but it has been so significant that inflation-adjusted tobacco tax revenue nationwide has waned in recent years despite frequent tax rate hikes. Revenue from tobacco taxes depends on high rates of smoking—which the taxes discourage—making these taxes an unreliable source of long-term revenue, especially for funding recurring budget items.

Research by The Pew Charitable Trusts and the Nelson A. Rockefeller Institute of Government similarly found that state revenue growth from taxes on alcohol and gambling is unlikely to be sustained due to how the products are taxed, changes in demand, and casino competition. In addition to studying state revenue trends for long- standing sin taxes, Pew and Rockefeller analyzed newer taxes on e-cigarettes and recreational marijuana. This report examines trends from 2008 through 2016 and relies on federal and state revenue data, academic and other relevant literature, and interviews with state officials.

Read more:

http://www.pewtrusts.org/research-and-analysis/reports/2018/07/19/are-sin-taxes-healthy-for-state-budgets#0-overview