Facing a budget deficit totaling $213.7 million, West Virginia Gov. Jim Justice (D) has proposed a series of tax hikes in his first budget that would increase the state’s reliance on sin taxes while only including minor spending cuts. In his State of the State Address, Justice proposed $450 million in tax hikes and only $50 million in spending cuts.
The governor has proposed hikes to the state’s sales tax, an expansion of the sales tax base by eliminating exemptions, a 10-cent-per-gallon hike to the gas tax, beer taxes, sugary-drink taxes, tobacco taxes, and a new gross-receipts tax. Combined, these tax hikes would represent the largest tax increase in West Virginia history. The increase to the sales tax alone would make the state’s average total local sales tax burden the second-highest in the region, according to the Tax Foundation.
The new tax proposal doubles down on sin taxes. West Virginia has become increasingly reliant on revenues gained from sin taxes on tobacco, alcohol, and gaming to close budget gaps. The two primary motivations legislators have for implementing and raising sin taxes are 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 tax revenues.
Governing magazine found West Virginia’s reliance on sin-tax revenues ranks third; about 11.5 percent of state tax revenue comes from sin taxes. Justice’s proposal furthers this reliance by creating a 1-cent-per-ounce tax on sugary drinks and increasing the cigarette tax by 50 cents per pack. These new tax dollars would be used to cover the budget deficit and fund pay increases for classroom teachers and $105 million in additional spending for infrastructure and economic development.
In a 2011 study, Scott Drenkard of the Tax Foundation found instead of improving obesity rates and health outcomes, soda taxes create a complex and unnecessarily confusing tax system where it is difficult to determine which products are “good” and which are “bad.” Drenkard also notes these taxes are applied to everyone, even those who use the products properly in moderation. “The solution to the obesity problem will not come from abdicating personal decisions like eating choices to government,” wrote Drenkard. “It will come from consumers making prudent decisions about their own diets, exercise and health needs.”
Although reducing smoking rates may be a noble goal, raising tobacco taxes rarely works as intended and frequently has many negative effects, including incentivizing residents to buy untaxed or lower-taxed tobacco elsewhere, thus harming local retailers. Cigarette taxes are highly regressive, unduly burdening moderate- and lower-income individuals. According to the most recent data from the U.S. Census Bureau, state revenue from tobacco product taxes fell in 2013 by 0.9 percent, to $17 billion. That decrease followed a 0.5 percent reduction in 2012. 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 have a strong detrimental effect on local small businesses; when they are implemented, retailers and wholesalers find themselves with decreased sales, as consumers seek to avoid the tax by purchasing products outside the county, city, or state imposing the tax. While 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.
The gross-receipts tax would place a tax on all business sales of any business it is applied to, regardless of the firm’s profits or losses. The end result of a gross-receipts tax is an overly complicated tax code and higher costs for consumers, who often have no idea how much in taxes they ultimately pay for their purchases.
West Virginia’s proposed tax hikes would only continue to hurt West Virginians and add to and create reoccurring budget deficits in the future.
The following documents examine sin taxes and gross receipt taxes in greater detail.
Democrat Governor Jim Justice Proposes Largest Tax Hike in West Virginia History
http://www.atr.org/democrat-governor-jim-justice-proposes-largest-tax-hike-west-virginia-history
Paul Blair of Americans for Tax Reform examines Gov. Jim Justice’s (D) tax proposal, arguing it would increase taxes more than any tax hike in West Virginia history. The decision comes after Justice promised on the campaign trail to never raise taxes.
Options for West Virginia Tax Reform
https://heartland.org/publications-resources/publications/options-for-west-virginia-tax-reform
In this study, the Cardinal Institute for West Virginia Policy examines the positive and negative impacts of tax reform on economic growth.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-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.”
Overreaching on Obesity: Governments Consider New Taxes on Soda and Candy
https://heartland.org/policy-documents/overreaching-obesity-governments-consider-new-taxes-soda-and-candy
Scott Drenkard of the Tax Foundation examines soda taxes and their effect on obesity rates. The study finds “such moves are unlikely to have an impact on obesity rates and health outcomes.”
Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes
http://www.taxfoundation.org/research/show/2061.html
This study by the Tax Foundation explains why gross receipts taxes are poor tax policy. The author notes that GRTs lead to harmful “tax pyramiding,” distort companies’ structures, and damage the performance of state and local economies.
Sugar Taxes Aren’t Sweet: The Case Against Pigouvian Taxes on Sugar-Based Drinks
https://heartland.org/policy-documents/sugar-taxes-arent-sweet-case-against-pigouvian-taxes-sugar-based-drinks
This research paper, written by Ryan Vinelli at Yeshiva University’s Benjamin N. Cardozo School of Law, examines arguments made against using tax policies to drive changes in public health behavior. Vinelli spends significant time analyzing governments’ use of sin taxes to discourage the consumption of sugar in beverages and foods.
Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
https://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-raise-tobacco-taxes
Heartland Institute Government Relations Director John Nothdurft argues targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned about the public health effects of tobacco should encourage the use of readily available smoking cessation products and services instead of supporting bad tax policy.
Sin Taxes: Size, Growth, and Creation of the Sindustry
https://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, although advocates of sin taxes claim those taxes are justified because the “sinners” impose costs on society, taxing “sins” for general budget revenue contradicts that argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being targeted results in unproductive lobbying aimed at preventing new industries from being considered “sinful.”
Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
https://heartland.org/policy-documents/five-things-consider-raising-tobacco-taxes-review-research
This Heartland Institute Policy Brief argues, “Tax increases above current levels are not justified by appealing to the costs smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”
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.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
