How Texas Taxes 'Sin' Levies Play Dual Role

by Lisa Minton

Texas collects most of its tax revenue on retail sales and various forms of business activity. Some taxes, however, commonly called “sin taxes,” are levied on the sale of alcohol and tobacco products as well as activities related to gambling. While these taxes, like all state levies collected in Texas, help fund state programs, they’re also intended to deter people from activities considered detrimental to their health or to society.

Texas’ sin tax collections reached $3.8 billion in 2015, accounting for 7.3 percent of all tax collections and 3.5 percent of total state revenue (Exhibit 1). (This analysis includes lottery revenue as a tax.)

Of the sin taxes, those on cigarettes and other tobacco products brought in the most revenue, at $1.5 billion. State revenue from gambling activities, which in Texas include the state lottery and pari-mutuel horse and dog racing, brought in $1.2 billion in 2015, although 99.7 percent of that total came from the state’s share of lottery proceeds alone. Alcoholic beverages contributed another $1.1 billion in taxes, about 30 percent of all sin tax collections.

Exhibit 1: Texas Sin Tax Collections, 2015 Sources 2015 Collections Share of Total Texas Tax Revenue Alcoholic Beverage Taxes $1,138,775,576 2.16% Cigarette and Tobacco Taxes $1,532,414,267 2.90% Gambling* $1,155,810,492 2.19% Total Sin Taxes $3,829,656,214 7.25% All Texas Tax Collections* $52,838,870,492 100.00%

* Includes state share of lottery proceeds.

Source: Texas Comptroller of Public Accounts

A Long, Sinful History

In the U.S., sin taxes can be traced back to the late 18th century, when the new nation assumed the debts incurred by the colonies during the Revolutionary War. To fund the debt, President George Washington’s Secretary of the Treasury, Alexander Hamilton, proposed a 7-cent-per-gallon tax on domestically produced distilled spirits. Approved by Congress as part of the Revenue Act of 1791, this “whiskey tax” was the first excise tax levied on a domestic product in the nation’s history. (An excise tax is a per-unit tax levied on a product.)

Tobacco taxes followed soon after, but were quickly repealed and did not surface again until the Civil War.

Farmers strongly resisted the whiskey tax, as many were using part of their harvests to produce distilled spirits for sale. Their refusal to pay the tax led to violence against its collectors during the infamous Whiskey Rebellion, which ended in 1794 when President Washington himself led 13,000 troops into western Pennsylvania to suppress the insurrection and confirm the supremacy of federal laws within the states.

The whiskey tax was repealed during Thomas Jefferson’s presidency, and distilled spirits remained untaxed until the 1860s, when the cost of the Civil War forced Congress to resume taxing alcohol — and additional goods, including cigars and other tobacco products — as part of the Revenue Act of 1862. In fact, between the Civil War and the creation of the federal income tax in 1913, most of the nation’s non-tariff revenue derived from excise taxes such as those on liquor and tobacco.

Most states began levying their own excise taxes on alcohol and tobacco products in the 1930s, when the Great Depression dented their other revenues. Lawmakers sought new revenue sources that would not overly burden the already struggling population.

An “Easy” Tax?

Today, all 50 states and the federal government impose some sort of tax on cigarettes and alcoholic beverages. State lawmakers often see sin tax increases as easier, politically, than raising state income, property or sales taxes, and in recent years have relied on them extensively to patch budgets. Since 2000, states collectively enacted 125 cigarette tax increases and another 31 on alcohol. The same period saw only 21 increases to state sales taxes, for instance.

One reason sin taxes may be more palatable than other taxes is because they fall only on those who use the product or partake in the activity — and many disapprove of the items and activities in question anyway. Also, sin taxes generally are built into the retail price of the product or activity, and consumers are not always aware they're paying them.

Generally, these taxes don't produce a significant share of state revenues, although some states rely on them much more than others. Governing magazine recently listed Rhode Island as the state most dependent on sin taxes, which contribute 15.9 percent of that state’s total tax revenue (Exhibit 2). Texas’ share was 4.6 percent, slightly above the national average of 3.8 percent in 2014. (Note that these percentages do not include lottery proceeds.)