States Eyeing Sin Taxes

Sin is in. Or at least the taxation of it is, if recent actions by state legislators and governors are any indication.

With almost every state running a budget deficit, lawmakers in at least thirty of them are looking to garner additional revenue by raising tobacco or alcohol taxes or expanding gaming — the so-called ‘sin taxes.’ In most cases, state lawmakers are doing so in lieu of increasing broader sales or income taxes, fearing the reprisal of voters in this major election year.

“Knowing that lawmakers are rather reluctant this year to raise general revenues, they are looking at alternatives. And sin taxes would fall in the sort of gray areas for states,” says Arturo Perez, fiscal analyst for the National Conference of State Legislatures. “These revenue enhancing measures are somewhat more palatable than income or sales tax increases.”

Twenty-three states are actively pursuing tobacco tax increases, according to NCSL. Thirteen are weighing proposals to increase alcohol taxes. And roughly 28 states have seen proposals to expand gaming operations and scope, according to a national anti-gambling group.

“It’s a feeding frenzy,” says Tom Grey, spokesman for the National Coalition Against Legalized Gambling. “Since Sept. 11, with the budget crisis, the gambling industry is back pushing its products.”

A Deutsche Bank report found that New York, Kentucky and Pennsylvania are highly likely to expand gambling in 2002, while Hawaii, Maryland and Ohio are all rated as having a “moderate” chance.

So far this year, Ohio has announced plans to join a multi-state lottery game — the Big Game — from which the state hopes to harvest $41 million in new lottery profits next year. Pennsylvania recently decided to join the 23-state Powerball game.

“For those states that have made the decision to join multi-state games, it could mean more money,” says David Gale, executive director of the North American Association of State and Provincial Lotteries.

But despite the profits gambling promises, not every state is leaping at the chance to expand its games.

New Hampshire lawmakers rejected a proposal to bring video slot machines into the state. Fearing an increase in crime associated with the machines, the New Hampshire Association of Chiefs of Police was among those leading the fight against the bill. And last month, a Hawaii House committee voted down bills authorizing casino gambling, while Senate leaders said they don’t plan on hearing any gambling bills.

“My read is we’re going to win some and lose some,” says the NCALG’s Grey.

Analysts say many more states can be expected to raise their cigarette taxes.

New York lawmakers approved in mid-January a cigarette tax increase of 39 cents, which officials hope will generate $150 million in fiscal year 2002. When the law takes effect in April, New York’s cigarette tax will be $1.50 per pack, the highest in the nation.

In Hartford, Conn., Republican Governor John Rowland proposed a 61-cent per pack increase that would generate $30.8 million in additional revenue in fiscal year 2002 and $122.3 million in fiscal year 2003. At $1.11, Connecticut’s tax would be third highest in the nation. The Hartford Courant reports the tax increase is proceeding on a fast track at the Capitol, with a single public hearing on the plan scheduled, and legislators aiming for a vote as early as Feb. 27.

Proponents of cigarette tax increases say they are good policy because they generate revenue and lead to a decrease in smoking.

“We are in a terrible budget deficit,” says Kentucky Rep. Mary Lou Marzian, in announcing her proposal to increase the state’s tobacco tax from 3 cents to 47 cents per pack. “It just seems like the right thing to do, with our tobacco tax being among the lowest in the nation and with our state being the highest in youth smoking.”

In addition, lawmakers can pass them off as voluntary taxes.

“If you don’t want to pay for it, don’t smoke,” said Minnesota Gov. Jesse Ventura, who proposed raising his state’s cigarette tax by 29 cents.

Cigarette manufacturers have been waging a state-by-state campaign against the proposed increases.

“There’s a very good argument to be made that adult cigarette smokers are paying more than their fair share of taxes,” says Tom Ryan, spokesman for Philip Morris USA. “Cigarettes are among the highest taxed consumer goods available. The average cost of cigarettes is about $3.35 per pack. Half of that is going to state and federal governments.”

In addition, some tax analysts fret about the regressivity of cigarette taxes.

“By and large this is a vice of the poor,” said Bill Ahern, spokesman for the Tax Foundation, a national clearinghouse for information on tax policy. “So when you raise these taxes, you’re making a policy decision to plug the deficit, or whatever you’re trying to do, with revenue from low-income citizens.”

“Nonsense,” says Pete Fisher, spokesman for the Campaign for Tobacco Free Kids, a group that advocates for raising tobacco taxes. “There is increasing evidence that lower-income people quit smoking at higher rates when the tax goes up than higher-income people do. The argument is just overwhelmed by the health benefits of the tax.”

Many states are also considering alcohol tax increases. Nebraska lawmakers have introduced three bills to raise its alcohol tax, and Washington lawmakers are discussing an alcohol tax increase, hoping to dent the state’s $1.6 billion deficit.

But experts say that unlike tobacco, alcohol is a much more politically sensitive source to tap for money.

“In the past, it’s always been very difficult to enact increases in alcohol taxes,” says Lee Dixon, a spokesman for the National Conference of State Legislatures. “First, it touches on a lot more people than cigarettes. Second, people don’t see it as the ‘sin’ that cigarettes are.”