‘Sin taxes’ could help states in pandemic budget slump — at least a little bit

WASHINGTON, D.C. — Gas tax revenue plummeted this spring, income taxes won’t rebound anytime soon and some states are offering a property tax holiday because people can’t pay during the pandemic. But so-called sin taxes are rolling in as liquor stores boom, marijuana sales continue, vapers vape and smokers smoke.

While not a huge portion of state tax revenue, sin taxes are a relative bright spot in a dark revenue picture. And some states are considering increasing those levies to make up some of the lost pandemic revenue.

Taxes on those items often are more politically palatable because they generally affect a smaller portion of the population and the purchases are seen more as a choice than a necessity.

“It’s just easier politically to increase taxes on 12% of the population than on 80% of the population,” said Ulrik Boesen, senior policy analyst at the Tax Foundation, a nonprofit that promotes lower, broader-based taxes.

But while sin taxes may be the “least bad option” for lawmakers looking to raise revenue, they tend to disproportionately hurt poorer people, Boesen noted.

“People on the lower income levels are hurting already,” he said. “We may not want to put an extra burden on them as they try to get back on their feet.”

Maryland approved a tobacco tax hike in March, and New Jersey is considering a cigarette tax hike that would lift its rate to the highest in the nation at $4.35 a pack, tied with neighboring New York and Connecticut. A tobacco tax is on the table in Georgia, a cigarette and vaping tax referendum is on its way to voters in Colorado and the Michigan Senate passed a bill to impose vaping taxes that the House is likely to approve.

States benefited from relatively stable alcohol and cigarette taxes during the pandemic because consumers wanted and had access to the products, said Lucy Dadayan, a senior economist at the Urban Institute. “Whereas in case of gas taxes, people were under lockdown in most states and so didn’t have to commute to work or travel otherwise and therefore the consumption was dramatically down.”

The Colorado legislature earlier this month put on the November ballot a measure that would gradually increase taxes on cigarettes and other tobacco products and institute a new tax on vaping devices and liquids. Under the legislation, a pack of cigarettes that now is taxed at 84 cents a pack would be taxed at $2.64 by 2027.

The measure, if approved by voters, would generate an estimated $80 million in the first year, and about $150 million annually by the last year of the increase, according to state Rep. Yadira Caraveo, a Democrat and one of the main sponsors of the legislation.

Caraveo said the bill would not bring in enough revenue to make a big dent in the estimated $3.3 billion budget hole caused by the pandemic “but it will certainly help.”

Brian Sigritz, fiscal analyst for the National Association of State Budget Officers, said tax collections from cigarettes, alcohol and marijuana across states have grown somewhat during the pandemic. Other revenue sources, such as personal income taxes and sales taxes, have plummeted.

Tax revenue from casinos declined; many closed for the pandemic and some are starting to reopen. But those closures also resulted in an uptick in instant lottery ticket sales, as money that would have been spent on other types of gambling found its way to the lottery market, particularly in scratch-off ticket sales.

Sin taxes followed similar patterns both in the Great Depression of the 1930s and the Great Recession of 2007-09, according to the Tax Foundation’s Boesen.

The same was true in the Great Depression, he said, though the tax system was quite different in the decade prior to 1929 when the market crashed. Most states then relied on property and gas taxes.

The Great Depression reduced property tax revenue by almost 20%. This led to the development of a number of consumption-based taxes that remain on the books.

Twenty-two states adopted general sales taxes during the Great Depression. By 1939, 48 states had imposed liquor taxes and 21 had levied cigarette taxes, which proved a stable source of income until smoking declined.