States Growing Interest in Sins Despite Shrinking Sin Tax Revenues - - PowerPoint PPT Presentation

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States Growing Interest in Sins Despite Shrinking Sin Tax Revenues National Tax Association 49th Annual Spring Symposium May 17, 2019 Lucy Dadayan and Richard Auxier Cigarette / tobacco taxation 1864 Federal government enacted

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States’ Growing Interest in “Sins” Despite Shrinking Sin Tax Revenues

National Tax Association 49th Annual Spring Symposium

May 17, 2019 Lucy Dadayan and Richard Auxier

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Cigarette / tobacco taxation

  • 1864 – Federal government enacted cigarette taxes as a Civil War

revenue measure

  • 1921 – Iowa became the first state to enact state-level cigarette excise tax
  • States levy tax on cigarettes, as well as other tobacco products.
  • Some local governments in six states — Alabama, Illinois, Missouri, New

York, Tennessee, and Virginia — also levy tax on cigarettes.

  • There are large tax disparities among various tobacco products (i.e.,

cigarettes, roll-your-own tobacco, small cigars, large cigars, pipe tobacco, etc.) as well as across states or even within the states, which trigger market shifts and tax avoidance.

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Substantial growth in median state cigarette tax rates

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0.48 0.47 0.46 0.74 0.77 0.84 0.97 1.02 1.19 1.27 1.34 1.39 1.37 1.40 1.44 1.42 1.53 1.60 1.57 $0.0 $0.2 $0.4 $0.6 $0.8 $1.0 $1.2 $1.4 $1.6 $1.8 Median state cigarette (pack of 20) inflation-adjusted tax rate

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States often increase cigarette tax rates, particularly during economic downturns

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1 9 22 11 10 7 9 10 8 11 5 3 2 4 2 10 5 4 3 6 9 12 15 18 21 24 Number of states increasing cigarette tax rates

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Downward trends in state tobacco tax revenues

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  • 10%

0% 10% 20% 30% 40% 50% 60% 1 2 3 4 5 6 7 8 9 1990 2001 2007 Number of years since the start of recession Cumulative percent change in inflation-adjusted state tobacco taxes

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Alcohol taxation

  • Alcohol tax has a long history dating back to the 18th century when Alexander

Hamilton, the first secretary of the Treasury, proposed the whisky tax.

  • 33 states regulate the alcohol industry through license systems, and 17 states

have a monopoly system of regulation. These systems have very different implications for tax revenue.

  • License states allow private enterprises to buy and sell alcohol at the states’

discretion and generally collect liquor-related revenue through excise taxes and license fees.

  • Monopoly states usually control the sale of distilled spirits and, in a few cases,

they also control wine. The monopoly states generally obtain revenue from markup on sales of liquor in state-run stores, but also may impose liquor taxes.

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Steady growth in alcohol revenues since 2008

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  • 10%
  • 5%

0% 5% 10% 15% 20% 1 2 3 4 5 6 7 8 9 1990 2001 2007 Number of years since the start of recession Cumulative percent change in inflation-adjusted alcohol taxes and liquor store revenues

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Why do states legalize and expand gambling?

  • Raise revenue in response to poor state fiscal conditions
  • Stimulate economic development
  • Counteract interstate competition for gambling revenue
  • Attract tourism & keep gambling residents & tax dollars in-state
  • Alignment of political interests in support of gambling

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Lottery timeline

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NH NY NJ CT MAPA MDMIOH RIDE IL ME VT AZ CO WA CAOR IAMO WV FLMT KS SDVA WI ID KY IN MN LA TX GA NENM SC ND TN OK NC AR WY MS

1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019

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Growth in lottery revenues is often driven by expansion Year-over-year real percent change, FYs 1990-2018

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ID, IN, MN LA, TX GA, NE NM SC ND, TN NC, OK AR WY

  • 6%
  • 4%
  • 2%

0% 2% 4% 6% 8% 10% FY 1990 FY 1991 FY 1992 FY 1993 FY 1994 FY 1995 FY 1996 FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

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Casinos / racino timeline

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NV - 1931 NJ IA SD CO IL MS LARI IN MODEWV MINM NY ME OK PA FL KS MD OH MA AR 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019

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Not much growth in casino/racino revenues despite expansion Year-over-year real percent change, FYs 1990-2018

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SD IA CO, IL MS, RI LA, MO WV IN DE MI, NM NY ME, OK FL, PA KS MDOH MA

  • 5%

0% 5% 10% 15% 20% 25% 30% 35% 40% FY1990 FY1991 FY1992 FY1993 FY1994 FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018

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Steep declines in casino/racino tax and fee revenues in early adopter states

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  • 12%
  • 10%
  • 8%
  • 6%
  • 4%
  • 2%

0% 2% 4% 6% 8% FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 United States Early adopter states Notes: Four states - Kansas, Maryland, Massachusetts, and Ohio - are identified as late adopter states since they all started casino/racino operations after FY 2008. Cumulative percent change in inflation-adjusted casino/racino tax& fee revenues

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Lessons from gambling revenues: Short-term relief, long-term disappointment

  • Gambling is NOT recession-proof
  • Gambling expansion brings in more revenue, until a saturation point

is reached

  • Some new revenue represents a shift, rather than net growth
  • Future growth in gambling revenue will not keep pace with tax

revenue, or spending

  • If gambling revenue is intended to support part of the overall

budget, gaps may emerge in future years

  • Gambling is a slow-growing revenue source & not a solution in the

never-ending quest to balance the budget

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States raised nearly $3 billion in marijuana tax revenues since inception

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$86 $280 $546 $749 $1,248 $- $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 $1,100 $1,200 $1,300 $1,400 CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 Millions Notes: Local government tax revenues and license/application fees are excluded. Marijuana state tax revenues, inception through end of CY 2018

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Recap: Marijuana tax rates and potential tax revenues

  • Marijuana taxation is complicated and is evolving as states are gaining more

experience and going through the steep learning curve.

  • Marijuana in most states is taxed in an ad valorem manner, which normally

has “automatic” growth potential, as prices rise.

  • States should forecast marijuana tax revenues with caution, particularly as

more and more states are legalizing marijuana.

  • The spread of marijuana legalization means the tourism demand for

marijuana will decline while in-state consumption would likely grow.

  • The spread of marijuana legalization would likely lead to a substantial drop

in wholesale prices, but would also mean higher rates of tax evasion, particularly if states end up with large discrepancies in marijuana tax rates

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How taxes on sports betting works

  • Handle: Amount of money wagered on sports.
  • Nevada’s handle in 2018 was $5 billion
  • Gaming revenue: Money the sportsbook collects from wagers after paying out successful

bets (but before it pays expenses and taxes).

  • Nevada’s gaming revenue in 2018 was $301 million
  • Hold: Gaming revenue divided by the handle.
  • Nevada’s hold in 2018 was 6.01%.
  • Tax revenue: Nevada had a 6.75% tax on gaming revenue (all states tax gaming revenue).
  • Nevada’s tax revenue from sports betting in 2018 was $20 million (or 0.4% of all

wagers).

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What states offer and tax sports betting

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State

Tax rate

Arkansas 13% (first $150 million) 20% (above $150 million) Delaware 43.75% District of Columbia 10% on private operators DC Lottery collects revenue minus expenses Indiana 9.5% Iowa 6.75% Mississippi 12% Montana Montana Lottery collects revenue minus expenses Nevada 6.75% New Jersey 9.75% in-person bet 14.25% online bet Pennsylvania 36% Rhode Island 51% Tennessee 20% West Virginia 10%

Source: State websites and legislation.

TABLE 1

Sports Gambling Tax Rates

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Revenue from sports betting: Estimates (and political promises) vs. reality

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State

Months of reported collections

Tax revenue collected

Annual projection

Delaware 10 $6.0 $5 Mississippi 8 $3.1 $5–10 Nevada 12 $20.3 NA New Jersey 10 $20.0 $12–17 Pennsylvania 5 $4.5 $5 Rhode Island 5 $0.7 $23.5 West Virginia 6 $0.9 $5

Sources: State gaming and lottery reports and the University of Nevada Las Vegas Center for Gaming Research. See apendix A for each state's regulatory agency. Representatives from Delaware and Rhode Island provided additional information.

Sports Betting Tax Revenue

Millions of dollars

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Thank you!

Lucy Dadayan LDadayan@urban.org @lucydadayan Richard Auxier RAuxier@urban.org @richardcauxier U R B A N I N S T I T U T E Tax Policy Center State and Local Finance Initiative

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