‘Sin Taxes’ Are Unlikely to Deliver Revenue Bonanza to New Jersey

John Reitmeyer | July 23, 2018 | Budget
Lawmakers in NJ recently enacted new taxes on e-cigarettes and sports betting. Analysis suggests the new taxes won’t do much for state coffers

Credit: NJ Online Gaming
Sports betting is expected to bring New Jersey modest tax revenue.
Tax revenue from legalized sports betting and e-cigarettes is now impacting New Jersey’s budget due to recent policy changes in Trenton, and legalized recreational marijuana use may not be too far behind. But a new report that looks at the next generation of so-called sin taxes throws cold water on the notion that they could provide cash-strapped states like New Jersey with a reliable fiscal bonanza.

The report compiled by The Pew Charitable Trusts looks at other states where taxes on things like e-cigarettes and legalized marijuana use have already been established; it also reviews the historical performance of sin taxes that have been on the books for decades in many states, including New Jersey’s long history with casino gambling.

What the researchers found is that the revenue stream from these activities has generally been subject to volatility as social trends and the regulatory framework have evolved, creating a level of uncertainty that makes it hard for policymakers to craft a responsible budget that relies too heavily on sin-tax revenues.

While the study takes a broad, national look at the issue, Pew’s words of caution are especially relevant for New Jersey as state lawmakers have recently enacted new taxes on e-cigarettes and sports betting, and as they continue to debate Gov. Phil Murphy’s call for legalized recreational marijuana use. So far, New Jersey policymakers have shown restraint when it comes to projecting revenues from new sin taxes, an approach that seems to be validated by Pew’s research.

“Given the unpredictability of sin tax revenue, states should be cautious about extending what may be effective short-term fallbacks into long-term solutions,” the Pew report says.

Lottery, gambling, drinking, smoking

New Jersey already ranks in the top half of U.S. states for relying on revenue from sin taxes to sustain spending, according to Pew. The Garden State takes in about 5 percent of its total revenue stream from the sin taxes currently on the books, which include levies on gambling, drinking, smoking and from the state Lottery. The national average for sin-tax revenue is 2.3 percent.

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The taxes that many states have levied for decades on smoking and gambling are cited as examples of the pitfalls policymakers can face if they rely too heavily on these activities to balance the books. For example, smoking has generally become much less popular in recent decades after peaking in the 1980s; even as taxes have been hiked on packs of cigarettes in many states, including New Jersey, the overall tax collections continue to drop as fewer people are smoking.

“As revenue continues to decline, states will face imbalances between diminishing taxes and steady or growing expenditures,” the report warns.

When it comes to gambling — a category that includes casinos, online gambling, and playing the lottery — New Jersey’s experience is specifically highlighted in the Pew report as a cautionary tale. Casino gambling in Atlantic City was legalized in 1976, and the casinos produced a windfall for the state budget for decades. But in more recent years, as nearby states like Maryland and Pennsylvania legalized casino gambling, New Jersey lost its regional monopoly and a good deal of its casino-tax revenue. In fact, revenues dropped by more than 50 percent between 2008 and 2015, according to Pew.

“While casinos do offer short-term padding for budgets, these funds often come at the expense of neighboring states and other casinos in the state,” the report said.

New Jersey is now among the states that permit legalized sports betting in the wake of a U.S. Supreme Court decision that was released in mid-May. The court ruling came as a result of New Jersey’s challenge to a longstanding law that only allowed such gambling to occur in Nevada and a handful of other states.

Keeping it modest

New Jersey lawmakers eventually set tax rates of 9.75 percent for in-person sports betting, and 14.25 percent for online betting, and the Murphy administration ultimately settled on a modest projection of just $12 million in revenue from sports betting in the $37.4 billion budget that that was signed into law earlier this month. That conservative approach seems to be validated by the Pew report, which notes that in Nevada — where sports betting is a firmly established offering — it only accounts for less than 1 percent of the state’s total revenue stream.

Places that have established new taxes on e-cigarettes and legalized marijuana use are also finding it difficult to produce reliable revenue projections, according to Pew. New Jersey lawmakers recently established a new tax of 10 cents on every milliliter of liquid nicotine, with the expectation that it could generate some $4 million in new revenue. But one thing that could hold back the state’s e-cigarette tax revenue is the number of existing smokers who are choosing to ditch their traditional cigarettes for vaping devices that use liquid nicotine.

“Research has shown that substitution between the two products is substantial,” Pew noted. “In 2015, nearly a third of adult e-cigarette users were former regular cigarette smokers.”

And if New Jersey does end up legalizing recreational marijuana use — something that is still up for
debate in the State House this summer — the Pew report suggests the setting of the tax rate on
marijuana sales will be a key factor in determining how much tax revenue those sales will ultimately generate for the state. For example, Oregon initially taxed the harvesting of all marijuana plants when it legalized recreational use in 2014 but has now decided to levy a 17 percent excise tax on marijuana sales.

In New Jersey, the tax rate on marijuana sales is still the subject of ongoing discussions as Murphy, a first-term Democrat, had initially called for a 25 percent rate. But lawmakers are pressing for a 7 percent rate to be established, at least initially. In addition, Murphy at first suggested close to $300 million in new revenue could come from legalizing marijuana in New Jersey, but those projections have since been scaled way back.

Policy changes in neighboring states could also impact the overall marijuana market, and officials in New York have recently started talking about legalizing marijuana there too.

“All of these variables make the long-term outlook for marijuana tax revenue hazy at best,” the Pew report says.