Are States Betting on Sin? The Murky Future of State Taxation

“Sin taxes” are often viewed as budget saviors, though they play a rather small role in state budgets. Although states raise revenue from sin taxes, policymakers should be mindful of these taxes’ limitations. Absent policy changes (such as increased tax rates), long-term growth for sin tax revenue has often been weak and limited. Moreover, greater dependence on sin tax revenues can lead to odd incentives: part of the reason for taxing some of these activities is to discourage consumption and use rather than to maximize revenue.

This report reviews the long-term revenue trends from the three most common sin taxes (alcohol, tobacco, and gambling) and explores how changes in economic activity may affect future revenues. The report also reviews the current status of emerging sin taxes, examining taxes on marijuana and providing overview for taxes on e-cigarettes and sugar-sweetened beverages.