‘Sin Taxes’ Could Help States in Pandemic Budget Slump — At Least a Little Bit

June 30, 2020by Elaine S. Povich, Stateline.org (TNS)
In a photo illustration, packs of menthol cigarettes sit on a table in New York City on November 15, 2018. (Drew Angerer/Getty Images/TNS)

WASHINGTON — Gas tax revenue plummeted this spring, income taxes won’t rebound anytime soon and some states are offering a property tax holiday because people can’t pay during the pandemic. But so-called sin taxes are rolling in as liquor stores boom, marijuana sales continue, vapers vape and smokers smoke.

While not a huge portion of state tax revenue, sin taxes are a relative bright spot in a dark revenue picture. And some states are considering increasing those levies to make up some of the lost pandemic revenue.

Taxes on those items often are more politically palatable because they generally affect a smaller portion of the population and the purchases are seen more as a choice than a necessity.

“It’s just easier politically to increase taxes on 12% of the population than on 80% of the population,” said Ulrik Boesen, senior policy analyst at the Tax Foundation, a nonprofit that promotes lower, broader-based taxes.

But while sin taxes may be the “least bad option” for lawmakers looking to raise revenue, they tend to disproportionately hurt poorer people, Boesen noted.

“People on the lower income levels are hurting already,” he said. “We may not want to put an extra burden on them as they try to get back on their feet.”

Maryland approved a tobacco tax hike in March, and New Jersey is considering a cigarette tax hike that would lift its rate to the highest in the nation at $4.35 a pack, tied with neighboring New York and Connecticut. A tobacco tax is on the table in Georgia, a cigarette and vaping tax referendum is on its way to voters in Colorado and the Michigan Senate passed a bill to impose vaping taxes that the House is likely to approve.

States benefited from relatively stable alcohol and cigarette taxes during the pandemic because consumers wanted and had access to the products, said Lucy Dadayan, a senior economist at the Urban Institute. “Whereas in case of gas taxes, people were under lockdown in most states and so didn’t have to commute to work or travel otherwise and therefore the consumption was dramatically down.”

For example, in Michigan, tax collections fell in every category in May but one: tobacco taxes, which increased 1.6% to $73 million from a year ago. For the year through May, the level was steady at a 0.1% increase. Tobacco taxes make up 4.5% of the state’s tax collections.

In Colorado, liquor tax collections went up from $3.4 million in February to $4.4 million in March, topping March 2019’s $3.8 million. And tobacco tax receipts were up 5% in April and May to $11 million compared with a year ago, according to Dadayan’s estimates.

The Colorado legislature earlier this month put on the November ballot a measure that would gradually increase taxes on cigarettes and other tobacco products and institute a new tax on vaping devices and liquids. Under the legislation, a pack of cigarettes that now is taxed at 84 cents a pack would be taxed at $2.64 by 2027.

The measure, if approved by voters, would generate an estimated $80 million in the first year, and about $150 million annually by the last year of the increase, according to state Rep. Yadira Caraveo, a Democrat and one of the main sponsors of the legislation.

Caraveo said the bill would not bring in enough revenue to make a big dent in the estimated $3.3 billion budget hole caused by the pandemic “but it will certainly help.” And, she said, the tax hike has a decent chance of being approved. It is one of the few tax increases that has some support in a state where a statute prohibits raising taxes without a supermajority.

“Colorado has been a relatively anti-tax state,” she said in an interview. “The ones they tend to be more open to are the so-called sin taxes.”

The Colorado Senate rejected a similar bill last year, in part because Democrats argued it was regressive and hit poor people disproportionately hard. But a petition drive appeared to be on its way to putting an immediate higher tax on the ballot, so the legislature along with industry lobbyists decided to design a bill that would accomplish the goal over a longer timeline, analysts said. Voters will see the phase-in plan on the November ballot.

Colorado Senate Democrats earlier this month moved to address part of the regressivity question by including a provision that would direct some of the money raised by the tax to housing relief for lower-income residents.

The Michigan Senate, which is controlled by Republicans, approved a six-bill package this month that would impose an 18% tax on vaping liquid and allow adults 21 and up to buy it in flavors. The bill goes to the House, where it is likely to pass.

Michigan State University economics professor Charles Ballard noted Republicans supported the tax increase, which is unusual. “I think sin taxes are often a relatively easy target,” he said in a phone interview.

“If you are a government and you are in a desperate fiscal situation, every penny helps, but $11 million or $12 million is a drop in the bucket,” Ballard said of the bill. “I’m not saying I’m against it, but we shouldn’t kid ourselves and say this is going to fix budget problems.” Michigan’s general fund is about $10 billion.

Michigan Senate Minority Leader Jim Ananich, a Democrat, testified in favor of the legislation, saying it would give adults a choice about whether to use the products. His spokeswoman said he was too busy to return phone calls.

Brian Sigritz, fiscal analyst for the National Association of State Budget Officers, said tax collections from cigarettes, alcohol and marijuana across states have grown somewhat during the pandemic. Other revenue sources, such as personal income taxes and sales taxes, have plummeted.

Tax revenue from casinos declined; many closed for the pandemic and some are starting to reopen. But those closures also resulted in an uptick in instant lottery ticket sales, as money that would have been spent on other types of gambling found its way to the lottery market, particularly in scratch-off ticket sales.

Sin taxes followed similar patterns both in the Great Depression of the 1930s and the Great Recession of 2007-09, according to the Tax Foundation’s Boesen.

“It is clear that excise taxes were less affected than income taxes during the Great Recession,” Boesen’s research paper said. “While most of us reduce some spending during an economic downturn, there is only so much we can — or are willing to — cut. For example, average spending on alcohol only declined 2.8% from 2007 to 2008. Spending on tobacco declined less than 2%.”

The same was true in the Great Depression, he said, though the tax system was quite different in the decade prior to 1929 when the market crashed. Most states then relied on property and gas taxes.

The Great Depression reduced property tax revenue by almost 20%. This led to the development of a number of consumption-based taxes that remain on the books.

Twenty-two states adopted general sales taxes during the Great Depression. By 1939, 48 states had imposed liquor taxes and 21 had levied cigarette taxes, which proved a stable source of income until smoking declined.

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©2020 Stateline.org

Distributed by Tribune Content Agency, LLC.

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