Why reliance on revenue from sin taxes is risky

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WASHINGTON – So-called sin taxes are a useful tool for supporting public health objectives and are sometimes used for budget revenues, but their sustainability as a revenue source is a mixed picture, according to a new study by Pew Charitable Trusts and the Rockefeller Institute of Government.

States increasingly are looking to sin taxes as short-term budget fixes by enacting new taxes on e-cigarettes and marijuana in jurisdictions where it’s legal, said Mary Murphy, the project director at Pew. Sin taxes also may be used to back municipal bonds.

“Sin taxes can provide short-term revenue boosts but because of a combination of factors they may also may present budget challenges in the long term and, when relied on for ongoing commitments, can create structural imbalances,” Murphy said.

The study adds to the growing body of findings by think tanks and credit rating agencies that highlight the pitfalls states face when considering new taxes on e-cigarettes and marijuana because of the changing habits of American consumers.

Some jurisdictions have tried using sin tax revenues to pay debt service on municipal bonds.

“Policymakers should take the long view when budgeting these revenue sources,” Murphy said.

The recent U.S. Supreme Court ruling that allows legalized sports betting also has states looking at that as a revenue source.

But Murphy cautioned that Nevada only brought in $17 million from sports betting in 2017 compared to the $9 billion in overall revenue.

California was the first among the 29 states and the District Columbia where the medical use of marijuana has been legalized.

Nine of those states and the District of Columbia also have legalized the drug for recreational purposes although it remains illegal on the federal level.

Ten of the states with legalized medical marijuana have enacted a tax on it, with most as an excise tax or general sales tax.

But there is no single tax structure that’s been adopted for taxing recreational marijuana.

“Nevada passed legislation in 2017 to distribute a portion of marijuana tax dollars to the state’s rainy day fund because policymakers saw it as an unpredictable source of revenue,” the study said. “Lawmakers feared that the state would have to scramble for funds if collections were dedicated entirely to education, as was initially intended.”

Moody’s Investors said in a May report on legalized marijuana that even in the states with the most established industries -- Colorado, Washington and Oregon — “marijuana-related tax revenue is a small percentage of annual general fund revenue and the potential for significant market expansion is limited.”

The Pew-Rockefeller study described “the long-term outlook for marijuana tax revenue hazy at best.”

The study found that taxes on cigarettes, alcohol and gambling provide an average of only 2.3% of state revenues.

The states most reliant on sin tax revenues were Nevada at 12% and Rhode Island at 11.1% using fiscal 2015 data.

The other top five states were West Virginia and Louisiana both at 8.1% of their revenue and New Hampshire at 7.9%.

The Tax Foundation has somewhat different numbers but that organization’s findings are similar.

Jared Walczak, senior policy analyst at the Tax Foundation, said some jurisdictions over-rely on sin taxes for specific purposes. He gave as an example the soda tax in Philadelphia which is being used to pay for pre-K and early childhood education. Soda consumption is declining, however.

Americans also are smoking less than they did in the 1980s but drinking more beer and wine.

The long-term decline in smoking has led to a drop in tobacco tax revenue even in some states that have raised taxes on cigarettes.

Only 19 of the 28 states that raised tobacco taxes between 2009 and 2016 saw a revenue increase over the period, Pew found.

“Increases are necessary, although not always sufficient” to grow tax revenue, Murphy said.

Twenty-one of the 22 states that didn’t raise tobacco taxes saw revenue fall over the same period.

Tobacco tax revenue declined nationally to $18.167 billion in 2015 from $18.445 billion in 2012, according to the Tax Policy Center.

Thirty-eight states, on the other hand, experienced an increase in alcohol tax revenue between 2009 and 2016 even though only six raised their alcohol taxes.

Gambling faces regional competition from other states and even within a state.

In Maryland, Murphy said the state’s five older casinos experienced a 16% drop in revenue from 2016 to 2017 that was attributable to the opening of MGM Grand at National Harbor just outside Washington, D.C.

Lottery revenue has been steady but flat on an inflation-adjusted basis over the period between 2008 and 2015, the report said.

The American Gaming Association reports 24 states have commercial casinos.

These riverboat, dockside, racetrack and stand-alone. land-based facilities operated by private companies under licenses issued by state governments experienced a 1.1% increase in consumer spending in 2016 to $38.96 billion.

But seven of the 24 states experienced a drop in gross gaming revenues compared to a year earlier.

Nine states overall experienced a decline in tax revenues from commercial gambling in 2016 compared to the year before, according to the gaming association.

The steepest drops were 9.17% in New Mexico and 4.34% in Louisiana. Delaware, Illinois, Indiana, Kansas, Missouri, Rhode Island and West Virginia also experienced drops.

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Government finance Tax research State and local finance Marijuana industry Pew Charitable Trusts Washington DC