The States Most Dependent on Sin Taxes

Taxing alcohol, tobacco and gambling isn't a good long-term revenue source. But states do it anyway.
by | August 21, 2015
Cigarette taxes are the most popular in states. (AP/Pat Wellenbach)

While a lot of states would like to find ways to raise more revenue, lawmakers frequently resist tinkering with income or sales taxes. One of the more politically feasible options in today’s political climate is to instead raise sin taxes.

States collectively took in approximately $32 billion in taxes on tobacco, alcohol and gambling in fiscal year 2014. Sin taxes not only raise money but are often intended to curb consumption on goods or services deemed harmful. However, they’re not without their shortcomings, particularly when it comes to generating revenue over the longer term.

State legislatures have shown they’re most apt to passing cigarette tax hikes. From fiscal years 2000 through 2015, states enacted a total of 111 tax increases on tobacco products and another 23 on alcohol, according to the National Association of State Budget Officers. Cigarette taxes aren’t a promising long-term source of revenue, though, as consumption has been declining for years and tax hikes often don’t raise as much revenue as expected.

Although more casinos continue to open in different parts of the country, gambling doesn’t represent a fast-growing revenue source either. Real tax revenues from commercial casinos were flat last fiscal year before falling slightly over the prior year, according to the Rockefeller Institute of Government. Lucy Dadayan, a Rockefeller policy analyst, said she expects gambling collections to grow at a much slower pace than expenditures and other sources of revenue. When states do take in more gambling-related revenues, she said, much of it results from revenue shifts across state borders or different forms of gambling.

The extent to which states rely on sin taxes varies greatly. While they’re not a major revenue stream, a select group of states do lean on them much more than others.

Governing tallied fiscal year 2014 tax revenues for states covering alcohol, casinos, racinos, tobacco products and video gaming. Sin taxes accounted for the largest share of total tax revenues in the following states:

Rhode Island (15.9 percent of tax revenue)

The nation’s smallest state geographically is most dependent on sin taxes as a source of tax revenue.

Two casinos serve as major revenue generators for Rhode Island, alone accounting for roughly a tenth of total state tax collections. Part of this is because 61 percent of video lottery terminal revenues from the state’s top casino (Twin River) are routed to state coffers -- a higher share than most other revenue sharing agreements.

However, Rhode Island’s reliance on gambling revenues will likely wane. The state already faces competition from neighboring Connecticut and is slated to soon lose out on additional revenue from Massachusetts, which recently passed legislation establishing three new casinos.

“There’s concern that it will make the structural deficit even worse,” said John Simmons, the Rhode Island Public Expenditure Council’s executive director. “It’s something that the state will have to deal with.”

Estimates on just how much revenues will drop vary. One state-commissioned report pegged losses of 36 percent to 41 percent of total lottery revenues (including gambling) between fiscal years 2015 and 2020.

Rhode Island also collects one of the largest sums of tobacco revenues relative to its total budget. In fiscal 2014, the state collected about 5 percent of its tax revenue from tobacco products. Its cigarette tax rate -- already one of the highest of any state -- was increased in its latest budget.

Nevada (14.8 percent of tax revenue)

It’s no surprise that the state known for gambling rakes in a sizable amount of revenue from its casinos. In all, Nevada reported casino tax collections exceeding $900 million in fiscal 2014, or about 13 percent of total tax revenues.

Nevada casinos saw steep declines during the recession, then gaming revenues increased four consecutive fiscal years beginning in 2011. For the fiscal year ending in June, statewide gaming revenues declined 1.6 percent.

Nevada Control Board Senior Research Analyst Michael Lawton said competition from California has affected some markets. Still, the state doesn’t experience fluctuations in revenues stemming from competition elsewhere in the same way other states do since Las Vegas is an international tourist destination, he said.

The state’s reliance on six taxes is also explained by what it doesn’t collect: Nevada is one of the few states without an income tax.

West Virginia (11.5 percent of tax revenue)

Like Rhode Island and Nevada, West Virginia collects significant gambling revenues for its size.

The state’s four racetrack casinos and one resort bring in about in $500 million annually in tax revenues. But the racing industry there has reported steady declines, prompting the state legislature to recently order a study of racing and gaming operations. Ideas floated to raise revenues include allowing for sports betting and sports bars with off-track betting.

West Virginia’s tax revenue shares for alcohol and tobacco products are comparable to that of other states.

New Hampshire (9.9 percent of tax revenue)

Sales taxes on tobacco products serve as a significant source of government funding for the Granite State. They alone accounted for nearly a tenth of total tax collections in fiscal 2014, by far the highest share nationally.

The New Hampshire Department of Revenue Administration reports that it leans more on tobacco revenues than other states because it’s without a general sales tax or a tax on earned income. The state may also benefit from cross-border cigarette sales since its tax rate of $1.78 per pack is the lowest in the Northeast.

Delaware (9.4 percent of tax revenue)

Delaware’s sin taxes are tied largely to both tobacco and gambling revenues. The state relies on the two sources as a share of tax revenue more so than other states.

Delaware is also one of five states without a general sales tax.

Rounding out the top 10 states were Louisiana (9.0 percent), Pennsylvania (8.0 percent), Indiana (6.8 percent), Iowa (6.6 percent) and Montana (6.5 percent).

Nationally, sin taxes accounted for 3.76 percent of total state tax revenues in fiscal 2014. Select your state to see how it compares:

Data notes

Tobacco, alcohol and total tax revenues were obtained from the U.S. Census Bureau’s 2014 Annual Survey of State Government Tax Collections. These figures may differ slightly from final numbers reported in state financial reports. Gambling revenue data was compiled by the Rockefeller Institute from state agency reports. Note that a small portion of these revenues, while recorded as state tax collections, are routed to municipalities in some states. 

State lottery revenues and revenues from state-operated liquor stores (other than taxes collected) were excluded from calculations. Figures for Connecticut have been updated to include casino tax revenues.