The fiscal reality of sin Taxes.

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States and local governments frequently relied on short-term revenue and expenditure strategies--including so called sin taxes (e.g. taxes on alcohol, tobacco, and gambling)--to get through the financial difficulties of the Great Recession. In some cases, this pattern continued, even as economic growth restored some measure of stability to many of their budgets. On April 2, 2015, the Federal Reserve Bank of Chicago and the Civic Federation held a forum to examine the use and efficacy of sin taxes levied by state and local governments. The findings are summarized in "Sin Taxes: The Sobering Fiscal Reality," a Chicago Fed Letter.

The forum considered whether sin taxes are guided by clear taxation principles that reduce behaviors society wishes to discourage, or if they are simply a convenient means to help boost state budgets. They also looked at questions of fairness, efficiency in raising revenues, enforcement costs, and how states and localities allocate revenues generated from sin taxes.

Jidong Huang, senior research scientist, University of Illinois at Chicago (UIC) Institute for Health Research and Policy, emphasized that hundreds of studies indicate that tobacco taxes improve public health. He also explained that "revenues to governments generally increase with increases to tobacco tax, although these revenue gains are not always sustained over time because of falling tobacco use." Huang also argued that "the regressive nature of the tax is a good thing to the extent that low-income people are more likely than their higher income counterparts to quit as a result of tobacco tax increases, and to thereby become healthier."

Brian Cooper, acting program administrator, Criminal Investigation Division, Illinois Department of Revenue, described the state's efforts to prevent cigarette trafficking and catch traffickers and noted that the risks for smuggling cigarettes are much less than those for smuggling drugs. Tobacco taxation statutes must be enforced in order to preserve state tax revenues; the...

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