Banking on sin: States profit as taxes rise on vice

One man’s sin is another man’s revenue base, at least when it comes to Uncle Sam’s tax coffers.

Federal and state governments annually rake in $96 billion in revenue fed by Americans’ appetites for easy money, nicotine and booze, according to an analysis by The Washington Times. Take away the taxman’s take on gambling, drinking and smoking, and many jurisdictions would be in serious financial straits.

All told, the gambling, tobacco and alcohol industries individually pay $24.9 billion, $44.3 billion and $27 billion, respectively, in annual state and federal taxes, a figure set to rise as cash-strapped government officials seek new money sources in a struggling economy, according to the most recently available data.

For example, Delaware receives $659 million of its total state revenue - almost 8 percent - from the gambling, tobacco and alcohol industries, ranking as one of the top 10 states dependent on so-called “sin taxes” in an analysis by the financial website 247WallSt.com. By June 30, the lottery alone contributed $287 million to the state’s general fund - an $11.5 million increase over the last fiscal year.

If Delaware gamblers all of a sudden refused to ante up, “we’d be having to replace a very significant piece of revenue,” said David Gregor, deputy secretary of finance at the Delaware Department of Finance.

“To claim that taxes have little impact on the industry is fundamentally flawed,” said David B. Sutton, a spokesman for Altria Group Inc., parent company for cigarette giant Philip Morris USA.

Sin taxes are applied to products or actions deemed socially undesirable, such as gambling, smoking, drinking and even consuming sugary drinks and fattening junk food. These extra fees play a big part in the amount of revenue generated by state and federal governments alike and are said to help close budget gaps as well as deter sinful behavior.

But Tim Haab, a professor of developmental economics at Ohio State University, noted in a recent analysis that tax collectors are exploiting the fact that smokers, drinkers and gamblers tend not to cut back on their vices, even with higher taxes.

“That’s right; so-called sin taxes don’t reduce the sin, they raise the revenue,” he noted.

The original purpose for many was to discourage unhealthy habits and addictions, but often it’s the governments that impose them that become addicted. And often the sin taxes wind up effectively being imposed on lower-income consumers.

Low-income Americans “will lug the load of any sin tax,” Katrina Trinko wrote in a recent op-ed column in USA Today. “Unlike income taxes, which exempt the poorest and have lower rates for those making less, there’s nothing progressive about sin taxes.”

Still, she noted, “politicians have rushed to raise these new levies as if they’re the policy equivalent of rescuing kittens.”

States are getting increasingly creative in finding new sins to tax, too: New York officials have battled all the way to the state Supreme Court in Albany to defend their right to impose state sales taxes on clubs that employ lap dancers, rejecting a lawsuit by the owner of an adult “juice bar” that the club is exempt from such taxes because its dancers are artists engaged in tax-exempt choreographed performances.

Some defend the sin taxes as the only way to finance the government programs designed to reduce the sin. Smoking-cessation programs, for example, often rely heavily on the taxes paid by smokers each time they light up.

Laurent Huber, executive director of the Action on Smoking and Health, said at a United Nations health summit last month that taxing tobacco products would be good for both the economy and public health. He cited a report that said “price and tax measures are an effective and important means of reducing tobacco consumption.”

“The role of the government should be taking care of public health and securing resources,” he said. “Higher tobacco prices [provide] a welcome source of revenue for the government and would have the double effect of creating revenue and addressing the public health issue. The added taxation will hardly put the industry out of business.”

The tobacco industry pays the most in terms of excise taxes out of any other “sin” industry - $32.7 billion compared with $7.6 billion in gambling taxes or $10 billion in alcohol excise taxes. This high rate of taxation on tobacco products, particularly cigarettes, drives consumers to avoid paying the taxes altogether, Mr. Sutton said.

“Excise taxes spur consumers in high-tax areas to seek to avoid them, which impacts retailers, governments and the tobacco company in question,” he added.

A “ripple effect” goes into action when consumers turn to purchasing online or out of their state or buying counterfeit products, he said.

“It ultimately results in job loss at the retailer.”

Ben Jenkins, vice president of government communications at the Distilled Spirits Council of the United States, said there are other ways to make money off of alcohol instead of lumping it into the sin tax category. He said that with numerous studies promoting the benefits of moderate drinking, alcohol shouldn’t be taxed as a sin.

Mr. Jenkins said that alcohol laws across the country are being repealed and revamped to generate new revenues without further burdening consumers with higher taxes. “Modernization” methods include re-thinking laws that ban alcohol sales on Sundays and decreasing the tax on alcohol on state levels.

David Ozgo, chief economist at the distilled spirits council, argued that alcohol “should not be in any sin-tax category.” Mr. Ozgo said studies have shown that when prices or taxes on alcohol are raised, consumption is reduced among light to moderate drinkers, but not abusive drinkers.

“If we’re looking at using excise taxes as a way to control abusive drinking, it doesn’t work,” he said.

John Warren Kindt, professor of business and legal policy at the University of Illinois, said the gambling industry “has got people mesmerized into thinking they’re winning when they’re, in fact, losing” and is being subsidized by taxpayer dollars. For every $1 in benefits, he said, the costs to taxpayers are $3 or more.

“Legalized gambling is the same as legalizing crack cocaine,” Mr. Kindt said. “Plenty of companies would line up for it, but everybody knows instinctively that the socioeconomic costs of legalizing hard drugs are so enormous that they would overwhelm any benefits. It’s the same with legalized gambling.”

Mr. Kindt said that the gambling industry temporarily creates jobs, such as in construction, but the industry eventually will drain jobs from the consumer economy.

“It’s taking down everything we’ve got,” he said. “People are going to have to decide if we’re going to save the economy or gamble it into oblivion.”

Frank J. Fahrenkopf Jr., president and CEO of the American Gaming Association, said the commercial casino industry is “a robust segment of the mainstream entertainment economy.” He said the gambling industry directly employs 400,000 people and indirectly supports an additional 475,000 jobs.

“We generate opportunities for tens of thousands of supplier businesses and substantial tax revenues for federal, state and local economies,” Mr. Fahrenkopf said. “These jobs, revenues and business opportunities are vital as communities across the country struggle to recover from the recession.”

Delaware is home to three casinos that provide various forms of gambling, including horse racing, sports betting, video lottery and table games. Additionally, 550 traditional retailer outlets provide Lotto, scratch-off tickets, Powerball and the like.

Vernon Kirk, acting director of the Delaware Lottery, said the gambling facilities are beneficial to the state’s economy. He said the casinos and racetracks provide employment for thousands of people, he said, and visitors spend their money on restaurants, entertainment, hotels and conferences, not just the gambling options.

“The money [made by the gambling industry] is not earmarked,” Mr. Kirk added. “It … provides a lot of state services that might otherwise have to be provided by extra taxes.”

Mr. Gregor said the industry provides positive aspects to the state economy.

“Because we’re bringing in dollars from outside our state, it’s like other forms of tourism,” he said. “It’s part of the hospitality and leisure section of our economic base, and it contributes to our state budget.”