A new report from the Urban-Brookings Tax Policy Center, examines the volatility of sin tax revenues. It’s a timely reminder. The TPC abstract tells the tale.
“Sin taxes” are often viewed as budget saviors, though they play a rather small role in state budgets. Although states raise revenue from sin taxes, policymakers should be mindful of these taxes’ limitations. Absent policy changes (such as increased tax rates), long-term growth for sin tax revenue has often been weak and limited. Moreover, greater dependence on sin tax revenues can lead to odd incentives: part of the reason for taxing some of these activities is to discourage consumption and use rather than to maximize revenue.
This report reviews the long-term revenue trends from the three most common sin taxes (alcohol, tobacco, and gambling) and explores how changes in economic activity may affect future revenues. The report also reviews the current status of emerging sin taxes, examining taxes on marijuana and providing overview for taxes on e-cigarettes and sugar- sweetened beverages.
On that last point, the Seattle Times recently reported this summer that Seattle’s sugar tax is the city’s fastest growing revenue source.
The authors point out that the “sin tax” label is elastic:
When people talk about sin taxes, they have historically meant taxes on alcohol, tobacco, and gambling. However, the spectrum of sin taxes has expanded in the past decade, possibly to the point that the term may no longer be useful. Depending on the state and locality, taxes are also being levied on products such as marijuana, e-cigarettes, sugar- sweetened beverages, and opioids. Although some of these newer sin taxes fit the traditional model (e.g., states and localities that tax e-cigarettes clearly want to reduce the use of e-cigarettes as a long-term substitute for cigarettes and reduce the temptation for children to start using), legalizations of other “sinful” goods and activities are designed to increase legalized activity and tax revenue through continued or expanded legal usage. For example, states that legalize and tax marijuana want consumers to consume the products in the legal market and thus generate tax revenue. And some might argue that gambling taxes should be considered an entertainment tax and not a sin tax.
As Washington sinners are surely aware, our state taxes sin heavily, despite our state ranking just 39th in reliance on sin tax revenues as a share of “own source general revenues,” according to the report. That probably says something about the size of the state budget, the effectiveness of high tax rates in discouraging consumption, and the lifestyle choices of Washingtonians. Because the rates are high.
Washington ranks first for distilled spirits taxes.
Distilled spirits per-gallon tax rates among the license states range from $1.50 in Maryland to $14.27 in Washington, with a national median of $3.77.
Washington ranks third in the state cigarette tax rate. In the relatively new world of marijuana taxation, the following chart documents Washington’s heavy play.
The Washington Research Council recently discussed the challenges associated with forecasting sin tax revenue. The TPC concludes,
In sum, sin taxes offer only limited revenue potential to governments. Expanding the consumption of sin goods and services has social and economic costs and benefits that often are hard to quantify and measure. Taxing sins is understandably appealing to officials wishing to raise revenue without raising taxes on income or sales, but the longer-term revenue picture is uncertain, and potential economic and social costs and benefits associated with these revenue sources require careful consideration. Greater dependence on these revenues can also set up odd incentives because part of the reason for taxing some of these activities is to discourage consumption and use, not to maximize revenue.
RouteFifty reviews the report and highlights an often-overlooked point.
in taxes are largely seen as regressive taxes that disproportionately target low-income households.
If states are hard set on changing consumer behavior, Dadayan said states should look to balance a tax punishment with a reward that steers consumers toward a desired behavior. For instance, when cities have proposed soda or sugary drink taxes, they could also consider options to make free water more available or to reduce costs of healthy drink options, she said.
“A better public policy decision would be not only punish, but also reward,” she said.