West Virginia has become increasingly reliant on revenues from sin taxes on tobacco, alcohol, and gaming to close budget gaps. Governing magazine recently published an article reporting states enacted a total of 111 tax increases on tobacco products and another 23 on alcohol between 2000 and 2015 according to the National Association of State Budget Officers. In 2014 alone, states collected around $32 billion in tobacco, alcohol, and gambling taxes.
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. The degree to which state governments rely on sin taxes is different from state to state. Governing magazine found Rhode Island, Nevada, West Virginia, New Hampshire, and Delaware relied the most heavily on sin tax revenues as a percentage of total state tax revenues.
According to the Charleston Gazette-Mail, the West Virginia Legislature has taken notice. During a recent session of the Joint Committee on Tax Reform in September, the members discussed the state’s sin taxes and examined ways to revamp West Virginia’s tax system. According to the Gazette-Mail, one issue they discussed was the state’s tobacco taxes, which are below the national average and do not apply to electronic cigarettes, a completely different product.
West Virginia should not undermine efforts to help people quit smoking by using e-cigarette and other vapor products. Data from the United Health Foundation show West Virginia’s tobacco use rate is among the highest in the nation. The average rate of cigarette smoking among U.S. adults ranges from 10.3 percent to 27.3 percent. West Virginia’s smoking rate of 27.3 percent in 2011 was the highest among the states.
Research suggests e-cigarettes are particularly helpful for heavy smokers who have tried and failed to quit using traditional methods, such as nicotine gum, nicotine patches, and medication. A comprehensive report published in the BMC Public Health Journal by Drexel University professor Dr. Igor Burstyn reviewed more than 9,000 studies of e-cigarette liquids and vapor. Burstyn found exposure to e-cigarette vapor poses no health threat to bystanders.
Imposing excise taxes on vapor products is not justified from a public health perspective, and it removes a prime economic incentive for smokers to improve their health by switching to e-cigarettes. Relying on sin taxes has proven to be poor tax policy because they are regressive, notoriously unreliable, and 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 distort markets, reduce economic competitiveness, and encourage unsustainable increases in government spending while placing an excessive burden on lower-income taxpayers. Instead of creating and increasing discriminatory taxes, West Virginia legislators should avoid the temptation of sin taxes and instead focus on tax reforms that lower rates, put dollars back in the pockets of taxpayers, and encourage government efficiency by creating reasonable limits on spending.
The following documents examine sin taxes in greater detail.
The States Most Dependent on Sin Taxes
Governing magazine tallied fiscal year 2014 state tax revenues, covering alcohol, casinos, racinos, tobacco products, and video gaming, identifying the states with the largest share of total tax revenues generated by sin taxes.
Levels of Selected Carcinogens and Toxicants in Vapor from Electronic Cigarettes
Tobacco Control found e-cigarette vapor contains some toxic substances, but only at levels “9–450 times lower than in cigarette smoke and were, in many cases, comparable with trace amounts found in the reference product.” The study finds replacing tobacco cigarettes with electronic cigarettes could substantially reduce exposure to tobacco-specific toxicants.
Research & Commentary: New Taxes, Regulations Proposed for E-Cigarettes in Indiana
As the use of electronic cigarettes has grown, state and local governments across the nation have moved to increase taxes on these products. The 2015 Indiana General Assembly considered legislation that would have imposed several new taxes and regulations on electronic cigarettes. Heartland Institute Senior Policy Analyst Matthew Glans argues vaping taxes are harmful to state economies and to states’ public health because they hinder a proven method for reducing tobacco use.
States Turn to Smokers for Band-Aid Budget Fixes
Mike Maciag of Governing magazine examines states’ increasing use of sin tax hikes to help fill budget gaps: “In the long term, cigarette taxes represent a less-than-ideal revenue source, because the money they bring in is gradually declining.”
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.”
Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
Heartland Institute Government Relations Director John Nothdurft identifies some of the most and least effective and economically advisable ways states use to trim their budget deficits.
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.
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.
Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
Heartland Institute Government Relations Director John Nothdurft contends targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned with the public health effects of tobacco should encourage the use of readily available smoking cessation products and services, instead of supporting bad tax policy.
The Political Economy of Excise Taxation: Some Ethical and Legal Issues
Excise taxes are used not only to raise revenue but also to alter or punish behavior. In many cases, excise taxes can be called “sin” taxes because they punish people for politically incorrect behavior such as smoking and consuming alcoholic beverages. In this article, Robert W. McGee examines the nonrevenue uses of excise taxes and analyzes their propriety from the perspectives of economics, law, and ethics.
The Economics of Sin Taxes
Writing for the Acton Institute, James Sadowsky explains how sin taxes affect the products they are imposed on, and he discusses the recent publish 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 subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
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 Logan Pike, Heartland’s state government relations manager, at [email protected] or 312/377-4000.