Policy Documents

States Facing The Unintended Consequences of High Sin Taxes

September 5, 2013

States are increasingly relying on“sin taxes” such as those on gambling, alcohol and cigarettes for a larger chunk of their budgets. One unintended consequence of this is the increased amount of smuggling, counterfeit products and the untaxed sales of highly taxed products such as alcohol and cigarettes. A recent Tax Foundation study found that at least thirty-one states lost sales and tax revenue in 2011 due to cigarette smuggling.

Not only does this smuggling punish local businesses and reduce tax revenue, but it can also lead to crime as business is conducted outside of legal circles. According to a report by the Mackinac Center on cigarette smuggling, in New York, over 60% of cigarettes in 2011 were purchased outside of the state and smuggled in to avoid its $4.35 tax per pack, which is the highest in the nation.

Earlier this year, the New York Police Department cracked down on a sixteen man smuggling ring responsible for $55 million in cigarette sales. Aside from smuggling and depriving the state of tax revenue, the suspects also have ties to an Egyptian-born member of Hamas who has been linked to terrorist activities. Despite being the largest known cigarette smuggling operation in the state, the group contributed only a minor dent to New York's $1.7 billion in lost tax revenue.

Similarly in Florida, WFTV Eyewitness News reported that, “Since 2006, Florida's tax on cigarettes has increased 294 percent. In that same time, the number of cigarettes smuggled into the state has more than tripled.” Nearly 20-percent of cigarettes consumed in Florida in 2011 were smuggled in to avoid the state's skyrocketing sin tax on cigarettes. Similar news has come out this year in states like California, Arizona, and Michigan

In many cases these taxes don’t have a significant impact on the social or health problem they claim to help fix. The bigger issue with sin taxes is the negative effect they have due to them being highly regressive, harmful to local businesses, and that they rarely produce reliable revenues for state’s when they are increased too high.

This week's edition of The Leaflet features Heartland work addressing sin taxes, smart growth, net neutrality, climate change reconsidered, school choice in Virginia and only one in four young Americans know about exchanges.

Respectfully,

John Nothdurft
Director of Government Relations
The Heartland Institute


LEAD STORY

Research & Commentary: Sin Taxes
Budget & Tax

According to a report by 24/7 Wall St., state governments collected more than $50 billion in “sin taxes” in 2011 from several products and activities including gambling, smoking, and alcohol consumption. The report found that Nevada, Rhode Island, Delaware, West Virginia, and New Hampshire (in that order) relied the most heavily upon sin tax revenues as a percentage of total state revenues.

The two primary motivations that legislators have for implementing and raising sin taxes is the desire to combat what they deem an unhealthy or immoral behavior and the opportunity to create or expand a revenue stream to bring in more money. Relying on sin taxes has proven to be poor tax policy due to being regressive, notoriously unreliable, and because such taxes are often used to prop up unsustainable spending increases.  

Lastly, sin taxes unduly burden moderate- and low-income individuals. A good example of this is found with tobacco taxes: According to the Bureau of Labor Statistics, 95.8 percent of tobacco expenditures are made by consumer households earning less than $150,000 a year.

Sin taxes have a strong detrimental effect on local small businesses; when they are implemented, retailers and wholesalers find themselves with decreased sales as consumers seeking to avoid the tax vote with their feet and buy products outside the state, city or county imposing the tax.

Sin taxes have demonstrated a tendency to be shifted to other products when their revenue runs short of expectations. While many states now levy sin taxes on tobacco and alcohol, other new sin taxes are beginning to expand to other subjectively determined items like soda pop, plastic bags, and tanning beds.

While sin taxes do sometimes result in increased revenue over the short term, they often lead to an even greater increase in expenditures that often cannot be supported by the tax over the long term, thereby creating budget shortfalls. High sin taxes by design aim to discourage certain product consumption or actions but they also encourage smuggling and other illegal actions.

Sin taxes should be avoided because they distort the market and encourage unsustainable increases in government spending while placing an unnecessary burden on lower-income taxpayers. Instead of creating and increasing discriminatory taxes, states should focus on tax reform that lowers rates, puts dollars back into the pockets of taxpayers, and tightens states’ by creating new, reasonable limits on spending.

 

WHAT WE'RE WORKING ON

Research & Commentary: Smart Growth
Finance, Insurance, and Real Estate

Government planners have coined the term “smart growth” to justify a litany of intrusions into the economic planning of our communities. Billions of taxpayer dollars are spent every year in various “smart growth” projects around the country. In this Heartland Institute Research & Commentary, Matt Faherty examines smart growth, how it emerged as a popular urban development strategy and some of the problems it creates.

“Opponents of government smart growth policies note that they have consistently failed to live up to expectations: the cities tend to have higher per-capita administration costs and increases in crime, and they fail to reach their environmental goals as higher population density increases traffic congestion and thus causes more pollution. In addition, population concentration and discouragement of automobile traffic in favor of public transportation frustrate consumer preferences for open space and transportation freedom.”

Capricious Net Neutrality Charges Part 32, FCC Open Internet Order Series
Telecom

Net neutrality is becoming a catch all regulation, with regulators using the law to combat behaviors that have little to do with net neutrality. In this article published on Heartland’s Somewhat Reasonable blog, Scott Cleland examines how regulators are misusing the net neutrality law.

Cleland uses the current case of CBS and Time Warner, where a group of Senators and Representatives have written to the FCC urging the agency to investigate CBS.com for what they call a net neutrality violation over its contract dispute over how much Time Warner Cable pays for retransmitting CBS programming.

Cleland contends that net neutrality laws have “rapidly devolved into a gotcha game — where if someone doesn’t like something or someone, they cry ‘net neutrality violation!’ and call for an FCC investigation — under the FCC’s self-asserted, all-powerful Open Internet order.”

 

“Apparently there is no objective, reasonable or predictable standard of what net neutrality is or what a violation of “it” is. That net neutrality has transmogrified into a political-catch-all for anything affecting consumers is powerful proof of how capriciously this issue has been abused.”

Climate Change Reconsidered II to be Released on September 17
Environment

The Heartland Institute and the Nongovernmental International Panel on Climate Change (NIPCC) have been hard at work since 2011 on a new edition of Climate Change Reconsidered. The first two volumes published in the Climate Change Reconsidered series, in 2009 and 2011, were widely recognized as the most comprehensive and authoritative critiques of the alarmist reports of the United Nations’ Intergovernmental Panel on Climate Change (IPCC). The new report, titled Climate Change Reconsidered II: Physical Science, will be released in digital form in September to coincide with the release of the United Nations’ Intergovernmental Panel on Climate Change (IPCC) 5th Assessment Report.

Heartland is planning to hold a press conference in Chicago on Sept. 17 at which it will announce the findings of the 1,200-plus-page report and release an executive summary.

Virginia Gubernatorial Candidate Proposes Raft of School Choice
Education

As the race for governor in Virginia heats up, education has become a focal point for gubernatorial candidate Ken Cuccinelli, who released his education platform Aug 9.
 
In this article from School Reform News, Virginia resident Ashley Bateman covers gubernatorial candidate Ken Cuccinelli’s twelve-point education plan, which includes, a “constitutional amendment to allow vouchers, tax credit scholarships, teacher licensing changes, a Parent Trigger law, and financial rewards for improving schools.”

Just One in Four Young Americans Know About Obamacare
Health Care

According to Heartland’s Benjamin Domenech, a new Commonwealth Fund study should be very worrisome to supporters of President Barack Obama’s law: Just one in four 19- to 29-year-olds is even aware of Obamacare’s exchanges.

The study found that, “From October 2013 through March 2014, young adults without affordable health insurance through an employer will be able to select a plan from their state’s insurance marketplace, with coverage beginning January 2014. Those with incomes under 400 percent of poverty will be eligible for subsidized coverage or Medicaid. The survey findings demonstrate just how critical outreach and education will be to inform young adults about their new options. Only 27 percent of 19-to-29-year-olds in the survey were aware of the marketplaces, with awareness lowest among those uninsured for some time during the year (19%) and those in low-income households eligible for subsidized coverage or Medicaid (18%). Awareness also varied by education levels: one-third of college graduates were aware of the marketplaces, compared with 20 percent of those with a high school degree or less.”