'Sin' tax hikes don't yield long-term revenue spikes

Sin isn't as profitable as it once was.

While state lawmakers continue to increase taxes on liquor, cigarettes and gambling, revenues from the so-called “sin taxes” aren't keeping pace. At $1.95 billion, 2012 revenue from those taxes was almost on par with that of 2003, even though most tax rates increased significantly, according to a Daily Herald analysis of Illinois Department of Revenue financial reports.

Some experts argue that the higher taxes are pushing away users who are finding cheaper alternatives in other states or on the Internet.

“One of the things people forget is that what they can do generating tax revenue, they still have to be careful about what the nearest inexpensive alternative is,” said Willard Manning, a health economist and professor at the University of Chicago. “At a time when state and local government are having financial problems, raising revenues on these items becomes an inviting target. But for the revenue piece, you'd think they'd recognize what's going on and what's driving business away.”

Since tobacco taxes were raised in 2002, revenues steadily have declined to pre-hike levels as cigarette purchases dropped in Illinois. Legislators last year doubled tobacco taxes, but revenue did not keep up. After getting $609 million in tobacco taxes in the previous fiscal year, the state generated $856.5 million from tobacco taxes in the fiscal year that wrapped up a few months ago, according to the state legislature's Commission on Government Forecasting and Accountability.

It's not all because people have cut back on tobacco use.

“We looked at what happened in other states when they had a dollar increase,” said Eric Noggle, a senior analyst at the commission. “Consumption declines were one factor, but other factors included going to neighboring states or Internet sales. The number of cigarettes sold drops about 25 percent to 30 percent. We assumed that would take place and that's definitely taken place.”

Officials at the state agency also said the $1 tobacco tax rate hike was anticipated to bring in about $50 million more, but manufacturers sued the state for tax stamps at the lower rate.

Chicago Mayor Rahm Emanuel announced plans this week to add 75 cents a pack to the city's cigarette tax, which already is one of the highest in the country. The black market for cigarettes has become so lucrative because of high tax rates that Cook County Board President Toni Preckwinkle recently acknowledged after a countywide tax enforcement crackdown that law enforcement has “seen dealers switch their focus from traditional drugs to smuggling cigarettes ... because it is more profitable and carries less jail time.”

While taxes on things like cigarettes and liquor are relatively easy to sell to many taxpayers, critics say a failure to maintain these revenue levels ultimately results in higher taxes for everyone. It's no surprise to Illinois Policy Institute Executive Vice President Kristina Rasmussen that sales and income tax rates have also increased in recent years.

“If you don't think this will affect you, it almost always does in the long run because the money almost never comes through like they think it will,” she said. “Someone's got to make up the difference, and that's where increases to sales and income taxes come in.”

The state's sales and income tax projections are also eroded by buyers going elsewhere for alcohol, cigarettes and similar products. Rasmussen said legislators are taking a shortsighted approach to revenue enhancements instead of solving long-term debt problems.

“They're trying to deal with the rising cost of pensions and health care by nickel and diming everywhere they can get away with it,” Rasmussen said.

Analysis of the state's tax receipts shows a revenue bump initially after a sin tax hike and then a gradual decline back to pre-hike levels in almost every instance.

In the case of gambling, lawmakers brought tax revenue back up only by adding new ways to gamble.

Gambling receipts mad`e up from taxes generated by casinos, horse racing, lottery and other betting activities have been in a steady decline since 2006 when they generated almost $1.4 billion for the state. Modest annual gains in lottery revenues are offsetting steep declines in revenue from horse racing, casinos and nonprofit gambling activities like bingo and raffle licenses, financial reports show. In 2012, the combined gambling-related taxes generated a little more than $1 billion. The state received a $30 million boost in its gambling tax receipts during the most recent fiscal year thanks to the infusion of taxes from newly allowed video gambling.

State liquor taxes nearly doubled in 2009. But revenues did not follow suit. Beer distribution sales have decreased since the tax hike was introduced, according to the state revenue reports.

The tax rate for hard liquor — anything with an alcohol content of more than 20 percent — went from $4.50 per gallon to $8.55 per gallon. That's only the state's cut. Local taxes can add another $5 in some locations, and the practice is seemingly growing.

Hoffman Estates officials Monday voted to begin taxing packaged liquor an additional 5 percent to help raise funds for road improvements.

The state's tax hike gave Illinois the 14th highest rate on hard liquor in the country, up from 24th before the bump went into effect. Across the borders in Wisconsin, Indiana and Missouri, tax rates on hard liquor are among the country's lowest. Missouri even reported an unexpected boost in alcohol sales when the liquor tax hike took effect in Illinois, according to media reports.

Because Illinois restaurants and bars are required by law to buy from state distributors, the tax hikes affect more than just a distributor's bottom line, industry officials said.

“Raising the taxes on wine and spirits is directly related to loss of jobs,” said Karin Matura, executive director of the Wine and Spirits Distributors Association of Illinois. “There is a price-sensitive point where a person won't go to a restaurant and buy a drink.”

Ultimately, Rasmussen argued that sin taxes don't make sense.

“Sin taxes are a double standard,” she said. “They punish what they call bad behavior, but on the other hand they assume taxpayers keep engaging in this bad behavior because our budget depends on these bad things.”

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While state lawmakers continue to increase taxes on booze, cigarettes and gambling, revenues from the so-called “sin taxes” aren’t keeping pace. At $1.95 billion, the state generated almost the same amount in tax revenue from these vices in 2012 as it did in 2003. Associated Press
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