Research & Commentary: Oregon Budget Should Not Rely on Sin Taxes

Published December 8, 2016

In November 2016, Oregon voters rejected a tax-hike plan that would have imposed a 2.5 percent gross receipts tax on Oregon businesses for all sales in excess of $25 million. In the wake of that decision, Gov. Kate Brown has proposed several new destructive tax hikes in her 2017–19 state budget. Brown’s $20.8 billion budget plan attempts to close the $1.7 billion hole in Oregon’s state budget using spending cuts and tax increases. The tax increases would mostly be applied to so-called “sin” products, such as alcohol and tobacco.

Lawmakers and government officials tend to expand sin taxes to other products when revenues run short of expectations. In addition to taxes on tobacco and alcohol, governments are beginning to expand sin taxes to other items not typically thought of as detrimental, such as soda pop, plastic bags, and tanning beds. Brown’s budget proposal seeks to generate $897 million in new revenue in 2017–19 by increasing taxes on tobacco, liquor, hospitals, insurers and some corporation owners’ incomes.

According to Brown, the proposal would create $35.2 million in new tobacco taxes and $33.8 million in new liquor taxes. The current tobacco tax would increase by 85 cents per pack for cigarettes, and new levy increases would also be imposed on other tobacco products, including snuff and cigars. The proposed increase would move Oregon from having the 30th-highest state tobacco tax to the 13th-highest. Other tobacco products will have their tax rates increased to 75 percent of their wholesale price. The state tax on liquor would be doubled, from 50 cents per bottle to $1 per bottle, and alcohol licensing fees would increase by 100 percent.

Although sin taxes do sometimes result in increased revenue over the short term, they often lead to an even greater increase in expenditures, which 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 activities. 

Sin taxes are regressive, notoriously unreliable, and are often used to prop up unsustainable spending increases. Most revenue estimates for new and increased sin taxes are never met. The National Taxpayers Union Foundation has found tobacco tax collections failed to meet initial revenue targets in 72 out of 101 recent tax increases.  Sin taxes also have a significant detrimental effect on local small businesses. Retailers and wholesalers experience decreased sales because consumers avoid the tax vote with their feet and buy products outside the state, city, or county imposing the tax. 

Sin taxes unduly burden moderate- and lower-income individuals. Tobacco taxes provide a good example of this phenomenon. According to the Bureau of Labor Statistics, consumer households earning less than $150,000 per year make 95.8 percent of tobacco expenditures

Sin taxes distort markets, reduce economic competitiveness, and encourage unsustainable increases in government spending while placing an excessive burden on lower-income taxpayers.

Oregon avoided taking a substantial step in the wrong direction when voters rejected the proposed corporate gross receipts tax. Legislators need to be careful not to implement new sin taxes, which will only make their state’s budget problems worse. Instead of creating and increasing discriminatory taxes, Oregon lawmakers should focus on encouraging government efficiency, pension reform, and placing reasonable limits on spending.

The following documents examine sin taxes in greater detail.

The Wages of Sin Taxes
In this paper by Christopher Snowdon of the Adam Smith Institute, the author examines the government’s decision to increase taxes on cigarettes and alcohol and to introduce minimum alcohol pricing in 2016. “The report argues that ‘sin taxes’ (taxes on commodities seen as harmful to health) are ineffective in reducing consumption and are not necessary for recouping lost revenue. The taxes are highly regressive and force the poor to pay for the government’s mishandling of public finances,” wrote Snowdon.

Regressive Effects: Causes and Consequences of Selective Consumption Taxation
In this study authored for the Mercatus Center at George Mason University, Adam Hoffer, Rejeana Gvillo, William F. Shughart II, and Michael D. Thomas examine selective consumption taxes. The authors argue they do little to change individual behavior and are extremely regressive, placing an unnecessary burden on the poor. “The study concludes that selective consumption taxes are both ineffective and regressive, and that improving education and increasing the availability of healthier goods may be better steps than raising taxes on those who can least afford them,” the authors wrote.

Sin Taxes Harm Public Health, Pocketbooks
Jesse Hathaway writes in this article for Budget & Tax News about the ineffectiveness of sin taxes. “Instead of using them as ‘health taxes,’ lawmakers are exploiting sin taxes as ‘stealth taxes’ to boost government revenue through a divide-and-conquer strategy, hitting small groups of people who cannot effectively fight back,” wrote Hathaway.

Ten Principles of State Fiscal Policy 
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

Sin Taxes: Size, Growth, and Creation of the Sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries.

Taxing Sin
Richard Williams and Katelyn Christ examine several myths about sin taxes in this Mercatus Center paper. “Recently, however, the arguments for imposing new excise taxes and increasing existing ones have reemerged across party lines and have spawned several myths about the efficacy of sin taxation,” they write. 

The States Most Dependent on Sin Taxes
Governing magazine tallied fiscal year 2014 tax revenues states received from taxing alcohol, casinos, tobacco products, or certain kinds of video games. The article outlines the states with the largest share of total tax revenues generated by sin taxes.

The Economics of Sin Taxes
James Sadowsky considers sin taxes, how they affect the products they are imposed on, and the public’s recent backlash against such taxes.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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