States Expand Laws to Capture Critical Sin Tax Revenue

Most people have heard of the term "sin tax." A sin tax is a tax on many of the things one would go to Vegas for. Things like, smoking, drinking, or gambling. In order to discourage such terrible, behaviors, state and federal governemtns often highly tax such activites.

Over the last several years,many state legislatures are reluctant to raise taxes in their state. Instead of raising tax on the voting constituents, the easier target are sin taxes, which target smaller groups for "bad behavior." Relying on sin taxes, which burden both in state and out of state residents, states bring in new revenue. In addition, there has been less of a push back on increasing these taxes, so the elected officials accomplish both goals.

The additional money often goes to public programs that relate directly to the product being taxed. States have had to get creative to keep their head above water as they have lost revenue over the past decade on taxes that have traditionally been big revenue sources. Across the board, less people smoke cigarettes, casino taxes have been diversified, and taxes on oil have declined. Consequently, states are considering or are already bringing new products into the sin tax category. These include: electronic smoking devices, sports betting, gaming, internet gambling, and even so far as to legalize and tax marijuana.

In a recent example, Philadelphia recently imposed a soda tax, which is the state’s newest addition to the sin tax category. The state is also considering to impose a tax on sugar as an ingredient as it recognizes many consumers may turn to alternative sweet treats other than sodas. Other states have chosen to continue to increase taxes on the traditional categories of sin taxes.

In another state, Connecticut is a state that will see both positive and negative short term effects after raising sin taxes. In 2015, the state raised the tax on cigarette packs by 75 cents as part of a two-year program. The state projects an added $42.8 million in revenue over the two years but also projects that over the following three years revenue will decline by $50.6 million as a result of sin taxes deterrent effect. Fortunately, in the long term this deterrent effect is very good for states as a recent study estimates in Oklahoma every percentage point decline in the adult smoking rate totals $320 million in reduced health-care costs, directly lowering state Medicaid spending. It is easy to see the short term gain but the long term loss of sin taxes throughout the country. Simply put, as the tax goes up, often times the "sin" being taxed in the state goes down.

From a tobacco tax perspective, states have raised taxes on tobacco products 111 times over the past 15 years and they have collected over $32 billion from sin taxes in 2014. To break it down, eleven states collected over $1 billion from sin taxes. Pennsylvania, New York, and Texas brought in the highest amounts from sin taxes in 2014, individually raising over $2.5 billion each. Pennsylvania generated over $1 billion from tobacco revenue alone and Texas generated over $1 billion in both tobacco and alcohol sin taxes. The other states that collected over $1 billion from sin taxes were: Nevada, Indiana, Illinois, Ohio, Michigan, New Jersey, Florida, and California. Wyoming and North Dakota brought in the lowest amount of revenue from sin taxes for the year 2014, both bringing in under $50 million.

As the push for lower taxes will continue, state legislatures will be forced to get more and more creative with what they will choose to bring into the sin tax category as well as increasing existing sin taxes. We have already seen this increase with the expanding tobacoc products laws to include e-cigs and vapor products. The Federal Government is alos getting in on the game with broader requirements for those that produce or import tobacco products and tobacco products accessorries. It will be interesting to see how sin taxes will evolve over the next decade.

About the Author: In his law practice Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini obtained his LL.M. in Taxation at NYU. Mr. Donnini is licensed to practice law in Florida. If you have any questions please do not hesitate to contact him via email [email protected] or phone at 954-639-4496.