Las Vegas Sun

September 26, 2018

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Report: States should be cautious as they look to sin taxes for revenue

So-called sin taxes on alcohol, tobacco and gambling are not a reliable source of state revenue, authors of a new research report warn.

Sin taxes are volatile and likely to shrink as more states look to expand sports betting under a new Supreme Court ruling and legalize recreational marijuana as a solution to budget issues, according to a report released today by Pew Charitable Trusts.

The report, “Are Sin Taxes Healthy for State Budgets,” is a joint project between Pew and the Rockefeller Institute of Government that found “taxes on vices are tempting, but unreliable sources of revenue.”

There is a possibility that states like Nevada could see tourism tied to sin tax industries contract as well, said Mary Murphy, Pew project director of state fiscal policy.

She said research found that as new casinos and racetrack-casinos open and cause a boost in gaming revenue in one area, this is offset by losses at older casinos, suggesting there may not be room to grow the gaming market.

“Time will tell, and we don’t have the data to know yet,” she said. “In many cases, (states) are building some of those expectations into their forecasts, that as their neighbors, for example, legalize recreational marijuana, early adopters may see fewer tourism dollars on that front.”

Sin taxes bring in a small percentage of revenue to states, Murphy said, though Nevada has the biggest share of any other state, representing about 12 percent of its total state tax revenue in 2015.

Sales taxes are Nevada’s largest source of revenue, accounting for almost 29 percent from 2017-2019, followed by more than 18 percent from the gaming percentage fee tax, according to the Guinn Center.

Lawmakers and state officials should be cautious in building sin tax revenue into their revenue projections, Murphy said.

“With all the attention that these types of taxes receive, policymakers need a clear understanding of their potential budget impacts,” she said. “This new research finds that sin taxes can provide short-term revenue boosts, but because of a combination of factors, they may also drive budget challenges in the long-term, and when relied on for ongoing commitments, can create structural budget imbalances.”

Sin taxes are imposed on activities and products that are considered unhealthy or somehow “undesirable,” and states generally cannot count on that revenue to increase without also expecting increases in use, Murphy said. It can depend on whether the product is taxed based on quantity rather than a dollar value.

Murphy said Nevada’s move to put marijuana tax revenue into a rainy day fund lines up with the uncertainty of this type of revenue.

The 2017 Legislature’s end-of-session budget debates led the state to funnel dollars from a 10 percent tax on recreational marijuana into the rainy day fund, with projected revenue going to education through the general fund. Nevada has seen more revenue than expected from recreational marijuana taxes in the year since legalization.

“Acknowledging that forecasting might be challenging, they decided to put aside some share of that revenue to guard against future volatility,” Murphy said.