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

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 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. WWW.TAXPOLICYCENTER.ORG 2

Substantial growth in median state cigarette tax rates Median state cigarette (pack of 20) inflation-adjusted tax rate $1.8 1.53 1.60 1.57 $1.6 1.19 1.27 1.34 1.39 1.37 1.40 1.44 1.42 $1.4 $1.2 0.97 1.02 $1.0 0.74 0.77 0.84 $0.8 $0.6 0.48 0.47 0.46 $0.4 $0.2 $0.0 WWW.TAXPOLICYCENTER.ORG 3

States often increase cigarette tax rates, particularly during economic downturns Number of states increasing cigarette tax rates 24 22 21 18 15 11 11 12 10 10 10 9 9 8 9 7 5 5 6 4 4 3 2 2 3 1 0 WWW.TAXPOLICYCENTER.ORG 4

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

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. WWW.TAXPOLICYCENTER.ORG 6

Steady growth in alcohol revenues since 2008 Cumulative percent change in inflation-adjusted alcohol taxes and liquor store revenues 20% 1990 2001 2007 15% 10% 5% 0% -5% -10% 0 1 2 3 4 5 6 7 8 9 Number of years since the start of recession WWW.TAXPOLICYCENTER.ORG 7

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 WWW.TAXPOLICYCENTER.ORG 8

Lottery timeline 2019 MS 2015 WY AR 2011 NC 2007 OK ND TN 2003 SC 1999 NENM 1995 GA TX LA MN IN 1991 WI ID KY KS SDVA WV FLMT IAMO 1987 CAOR WA CO 1983 AZ 1979 VT ME RIDE IL MDMIOH 1975 MAPA CT NJ 1971 NY 1967 NH 1963 WWW.TAXPOLICYCENTER.ORG 9

Growth in lottery revenues is often driven by expansion Year-over-year real percent change, FYs 1990-2018 10% GA, NE WY 8% 6% NC, OK SC ND, TN ID, IN, 4% MN LA, TX NM AR 2% 0% 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 -2% -4% -6% WWW.TAXPOLICYCENTER.ORG 10

Casinos / racino timeline 2019 AR 2015 OH MA 2011 ME OK PA FL KS MD 2007 NY 2003 IN MODEWV MINM 1999 IA SD CO IL MS LARI 1995 1991 1987 1983 1979 NJ 1975 1971 1967 NV - 1931 1963 WWW.TAXPOLICYCENTER.ORG 11

Not much growth in casino/racino revenues despite expansion Year-over-year real percent change, FYs 1990-2018 40% WV 35% LA, MO 30% 25% MS, RI 20% IN DE 15% MI, NM NY 10% FL, PA CO, IL SD MDOH 5% IA MA ME, OK KS 0% 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 -5% WWW.TAXPOLICYCENTER.ORG 12

Steep declines in casino/racino tax and fee revenues in early adopter states Cumulative percent change in inflation-adjusted casino/racino tax& fee revenues United States Early adopter states 8% 6% 4% 2% 0% FY FY FY FY FY FY FY FY FY FY FY -2% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 -4% -6% -8% -10% -12% Notes: Four states - Kansas, Maryland, Massachusetts, and Ohio - are identified as late adopter states since they all started casino/racino operations after FY 2008. WWW.TAXPOLICYCENTER.ORG 13

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 WWW.TAXPOLICYCENTER.ORG 14

States raised nearly $3 billion in marijuana tax revenues since inception Marijuana state tax revenues, inception through end of CY 2018 $1,400 Millions $1,248 $1,300 $1,200 $1,100 $1,000 $900 $749 $800 $700 $546 $600 $500 $400 $280 $300 $200 $86 $100 $- CY 2014 CY 2015 CY 2016 CY 2017 CY 2018 Notes: Local government tax revenues and license/application fees are excluded. WWW.TAXPOLICYCENTER.ORG 15

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 WWW.TAXPOLICYCENTER.ORG 16

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). WWW.TAXPOLICYCENTER.ORG 17

What states offer and tax sports betting TABLE 1 Sports Gambling Tax Rates Tax rate State 13% (first $150 million) Arkansas 20% (above $150 million) Delaware 43.75% 10% on private operators District of Columbia DC Lottery collects revenue minus expenses Indiana 9.5% Iowa 6.75% Mississippi 12% Montana Montana Lottery collects revenue minus expenses Nevada 6.75% 9.75% in-person bet New Jersey 14.25% online bet Pennsylvania 36% Rhode Island 51% Tennessee 20% West Virginia 10% Source: State websites and legislation. WWW.TAXPOLICYCENTER.ORG 18

Revenue from sports betting: Estimates (and political promises) vs. reality Sports Betting Tax Revenue Millions of dollars Months of reported Annual Tax revenue State collected collections projection Delaware 10 $6.0 $5 $5–10 Mississippi 8 $3.1 Nevada 12 $20.3 NA $12–17 New Jersey 10 $20.0 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. WWW.TAXPOLICYCENTER.ORG 19

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 WWW.TAXPOLICYCENTER.ORG 20