Declining Sin Tax Revenues Cripple Connecticut Budgets

Published May 19, 2015

As Connecticut lawmakers try to fix a projected annual $1.3 billion deficit, tobacco excise tax revenues in Connecticut continue to decline.

Between fiscal year 2012 and fiscal year 2014, tobacco sin tax revenues fell by 15 percent, from $420.8 million to $377 million.

Conflicting Goals

University of Wisconsin-LaCrosse assistant professor of economics Adam Hoffer says sin taxes serve both a stated goal and a secondary, hidden goal.

“Sin taxes serve two purposes,” said Hoffer. “One, their goal is to decrease consumption, and the second, hidden goal is to bring in more tax revenue.”

Hoffer says sin taxes are good for achieving the hidden goal, but not the stated one.

“Basic economics tells us that consumption will fall if the price of any good increases, including if we put a tax on it, but one question that economists have asked for quite a while is ‘by how much will that consumption fall?'” Hoffer said. “That is, ‘how responsive is consumption to a change in price?’

“What we’ve observed is that for these goods, these ‘sin’ goods, consumption is very unresponsive to price, said Hoffer. “Let’s say an 8–10 percent increase in price leads to only about a 3 or 4 percent decrease in the consumption of these goods.”

Regressive Tax Burdens

The burden of sin taxes falls disproportionately on low-income households, Hoffer says.

“These goods are consumed relatively more by lower-income households, so there are not a ton of great substitutes for these goods,” Hoffer said. “Apple slices are not a great substitute for potato chips. It’s difficult to find a great substitute for beer, cigarettes, or a soda.”

Hoffer says lawmakers should be honest about why they want to increase or introduce sin taxes.

“If this goal is to raise revenue … yes, the taxes will raise revenue,” Hoffer said. “Unfortunately, that revenue comes largely from lower-income households. If the goal of a sin tax is to reduce consumption, we have better means to try to reduce consumption that don’t have these harmful effects on low-income households.”

‘Kind of a Fixed Revenue’

Suzanne Bates, a policy advisor for the Yankee Institute for Public Policy, says lawmakers employ sin taxes primarily as revenue sources.

“The government tends to make a lot of money off of these sin taxes, and so it as seen as kind of a public good,” Bates said. “We tax the things that we think cause health problems, and then we get kind of a fixed revenue.”

‘Easy Things to Raise’

Bates says lawmakers need to be more realistic about sin tax revenue.

“We have a pretty bad budget situation right now,” said Bates. “We have billion-dollar deficits for the next two years that lawmakers are trying to fill, so they’re looking at raising all taxes, and everything is on the table right now. So, cigarettes and alcohol are the easy things to raise, but when you look at those taxes, it’s not going to give you the revenue you think it is.”

Amelia Hamilton ([email protected]) writes from Traverse City, Michigan.