April 16, 2015
The Civic Federation joined with the Federal Reserve Bank of Chicago on April 2, 2015 to co-host a conference on the use, efficacy and future of sin taxes. Experts, practitioners and academics from around the country gathered to discuss the theories surrounding governments’ use of sin taxes as well as national trends and issues specific to tobacco, marijuana and gaming revenue. Attendees to the conference included civic and business leaders and government officials. To download participants’ presentations, click here.
- Opening Remarks
- Session I — Competition and Cooperation: Cross-Jurisdictional Issues and Tobacco Taxes
- Session II — High Times? Marijuana Legalization in Colorado and Medical Marijuana in Illinois
- Keynote Address
- Session III — At the Tipping Point: Gaming Expansion vs. Falling Resources
- Photo Gallery
Professor Adam Hoffer of the University of Wisconsin-LaCrosse started his presentation by noting that sin taxes have a long history of use in the United States going back to the taxation of alcohol during colonial days. The justifications generally given for the use of sin taxes are 1) to reduce consumption and 2) to raise revenue. However, he noted that the revenue raised by the tax also has a cost in that it is money that consumers could have spent elsewhere. Therefore, since many studies have shown that, for example, cigarette consumption does not decrease significantly with an increase in taxes, the cost to consumers may exceed the societal benefit of the tax from decreased smoking. Additionally, Prof. Hoffer raised the fact that sin taxes are known to disproportionately impact low-income households, which raises fairness issues. Since sin taxes only make up a small proportion of government revenues, Prof. Hoffer suggested that replacing them with broader-based taxes like the property tax or the sales or income tax would be preferable from an economic perspective, though probably not politically palatable. He also submitted that governments might also use a “carrot” approach to incentivize healthier choices, instead of only the “stick” approach of higher taxes.
The first panel discussed challenges, opportunities and the future of tobacco taxes in Illinois, as well as the role taxes play in governments’ goals to reduce tobacco use among residents. Civic Federation Board member Adrienne Archia moderated a lively discussion of enforcement and budgeting issues and the wider philosophical questions associated with tobacco taxation.
Dr. Jidong Huang, Senior Research Scientist at the University of Illinois at Chicago Institute for Health Research and Policy, explored some of the economic arguments for and against tobacco taxation and presented research results from around the world that reinforce efficacy of tobacco taxes. Dr. Huang emphasized the strong evidence from hundreds of studies that tobacco taxes improve public health, with tax increases especially correlated with reduced consumption and increased cessation among current smokers and reduced take-up rates among non-smokers. Brian Cooper, Acting Program Administrator at the Illinois Department of Revenue, discussed cigarette taxes from the enforcement perspective, describing the State of Illinois’ efforts to prevent trafficking and catch traffickers. He said that the large difference in tax rates between Illinois and some surrounding states, such as Missouri and Kentucky, makes cigarette trafficking very lucrative while the risks associated with smuggling are much less than for illicit drugs. Enforcement is therefore very important to preserve State revenues and discourage smuggling. Ivan Samstein, Chief Financial Officer of Cook County, described the relative importance of tobacco and other sin taxes within the County’s budget. He explained how the County is coping with the continuation of a long-term decline in tobacco use and therefore reduced tax revenues when it has an increased need for tobacco tax enforcement. He said that the County’s strategy to reduce youth smoking rates with its tobacco tax is working, and the County is adjusting its overall long-term fiscal structure to compensate for lost revenues and other fiscal stresses.
The second panel, moderated by Rick Mattoon, Senior Economist and Economic Advisor at the Federal Reserve Bank of Chicago, spoke about a possible new frontier in sin taxes with the legalization of recreation marijuana in four states and the recent approval of a pilot medical marijuana program in Illinois.
Illinois State Representative Lou Lang told attendees about the six-year legislative process he led that eventually resulted in a pilot medical marijuana program for extremely ill individuals in Illinois. He described the structure of the program and said its implementation has been bogged down in administrative delays, but should be operative by the fall of 2015. He emphasized that the program was never intended to be a revenue-generator for the State of Illinois. However, it will eventually generate some revenue and jobs for the State, in addition to providing relief to thousands of individuals with 30 specific severe illnesses. Andrew Freedman, Director of Marijuana Coordination at the State of Colorado, gave attendees an overview of the history of how Colorado became the first US state to legalize recreational marijuana and described the tax structure associated with the legalization. It is crucial to understand that recreational marijuana was legalized in Colorado, along with the tax structure, via citizen referendum, not via legislative initiative. The referendum was passed in 2012 and by January 1, 2014 the state had a regulatory process in place to track growing, distribution and sales that has proved to be successful. Mr. Freedman also emphasized that while $71 million was collected by the State of Colorado in marijuana revenues in 2014, these revenues were not the purpose or focus of the program. The revenue is enough to cover regulation costs, but not to boost the State’s budget.
Scott Pattison, Executive Director of the National Association of State Budget Officers (NASBO), provided a nationwide perspective on states’ use of sin taxes and their overall fiscal condition. He said that state budgets have generally shown modest growth, mirroring slow growth in the economy as a whole. States’ fiscal condition has generally improved since the recession, but they continue to face long-term spending pressures and below-average growth in revenues. Looking nationwide at trends in sin taxes, between 2000 and 2015 there were over four times as many increases to tobacco tax rates at 111 than increases to alcohol taxes at 23 increases. There were only four reductions to tobacco taxes and eight reductions to alcohol taxes over the same period. While tobacco and alcohol taxes brought in a combined $24.1 billion to state and local governments in 2012, in comparison to total state general fund revenue of $672.8 billion the same year, these sin taxes are small compared to the major revenue sources of income and sales taxes and federal transfers. From a budgetary perspective, Mr. Pattison emphasized that while sin taxes are useful to pay for regulation, discourage use of harmful products and provide some extra funds to governments, they are not a solution for budget problems and can even be a distraction from major fiscal challenges. He recommends that the reasons and justification for the use of sin taxes be discussed before they are implemented or increased.
The third and final panel of the day tackled the question of national and local trends in gaming revenues and what the prospects are for future gaming expansions in Chicago and Illinois. Elizabeth Coolidge, Civic Federation Board member and Managing Director at PNC Capital Markets, moderated a discussion that explored the question of whether gaming has become so ubiquitous that new expansions will not significantly increase revenue.
Lucy Dadayan, Senior Policy Analyst at the Nelson A. Rockefeller Institute of Government, looked at national trends in gaming revenues and expansions. She described the different kinds of legalized gaming in the U.S., of which the lottery is the largest, bringing in 64% of gaming revenue in the nation in 2014. Particularly interesting is the recent trend showing that while there has been an increase in the number of casinos across the country, gaming revenues have not significantly increased. Ms. Dadayan said that, when considering gaming expansions, policymakers must keep in mind that gaming is a slow-growing revenue source and at least some of the revenue associated with expansions represents a shift from other sources rather than net growth. Thus, gaming should not be considered a long-term solution to balancing the budget.
Peter Matuszak, Senior Policy Analyst at the Civic Federation, examined the State of Illinois’ gaming revenue trends, which have been relatively flat or on the decline in the last several years. He described the different kinds of gaming implemented by the State of Illinois, with a particular focus on the video gaming program authorized in 2009 that was to be a source of revenue for the State’s multi-year capital improvement program. Mr. Matuszak also reviewed a recent gaming expansion proposal that would have created a casino in the City of Chicago and other locations around the state and also created “racinos” that would allow gaming terminals at racetracks. The revenue impact of the expansion was projected to be very mixed with a large one-time revenue increase from the up-front sale of licenses coupled with an expectation that ongoing revenues from existing casinos would decline. Mark Ostrowski, Director of the Illinois Gaming Board, explained the purpose of the Gaming Board and how it was tied to the State of Illinois’ legalization of riverboat gambling in the early 1990s. He provided a history of legalized gaming in Illinois and then focused on how the Gaming Board implemented the rollout of video gaming in Illinois and the difficulties associated with policing thousands of terminals spread across the State. He said that the number of video gaming terminals are equivalent to 26 casinos. The consequence of so much legalized gaming is that the State is starting to see casinos go out of business and flat gaming revenues, despite the video gaming expansion.
On behalf of the Federal Reserve Bank of Chicago and the Civic Federation Board of Directors, many thanks to all of our moderators, panelists and attendees. Thanks also to the staff of the Federal Reserve for their assistance. To download participants’ presentations, click here.