As state budgets strain under huge debt loads, they increasingly rely on "sin taxes," one of the few consistent sources of revenue in these uncertain economic times.
States have profited from the public's voracious appetite for easy money (gambling), nicotine (smoking), and booze (alcohol) for years. Some are more successful at it than others. A few states generate less than 1% of their revenue from preying on their residents' vices, while sin accounts for between 5% and 13% of the budgets of others. Some of the difference can be chalked up to varying rates of addiction, but aggressive tax policy also plays a part. Pennsylvania makes the greatest percent of its revenue from gaming taxes of any state. It charges a 55% tax on slot machine proceeds. Conversely, Las Vegas collects only 8%.
Sin is profitable for many reasons. For one thing, it sells. In New Hampshire, more than half of its state revenue comes from tobacco sales. Meanwhile, states like Michigan generate revenue evenly across all sins. Still others, such as New Jersey, make a great deal from these bad habits because they're taxed at such a high rate.
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To identify the states that make the most money from sin, we calculated the taxes and revenue each state makes from gambling, alcohol, tobacco, and lotteries and compared the receipts against the total revenue for the state. The Tax Policy Center provided alcohol and tobacco tax receipts for 2008, the year for which data is most recent. The North American Association of State and Provincial Lotteries provided state lottery receipts. Revenue from taxes on gambling, as distinguished from lotteries, was obtained from The American Gaming Association.
Sin taxes should be viewed in context of the broader economy. Many investors are concerned that the anemic economic recovery will sputter further, particularly as the debate over the debt ceiling continues to rage.
Members of the GOP, led by Speaker of the House John Boehner (R-OH), have indicated that they will not vote to raise the debt ceiling without significant spending and budget cuts, including popular entitlement programs such as Medicare and Medicaid.
In addition to demanding changes to entitlement and spending cuts, Republicans are refusing to consider any tax increases. While that may make sense to some, an exception should at least be made for sin taxes. There are many who maintain that income taxes, property taxes, and even corporate taxes should remain fixed, or even lowered. Increases in income taxes could dampen consumer spending, the argument goes. That's hardly a prudent course of action for a struggling economy. Likewise, raising property taxes would further harm the languid housing market. And corporate taxes, especially for small businesses, are often regressive, and could ultimately discourage hiring if they are raised too high.
That's one reason states are more dependent on sin than ever.