Sin tax increases in Minnesota?

Talk of “sin tax” increases has picked up at the state capitol. Two bills that would increase taxes on alcohol were heard in House Tax Committee on Wednesday, April 15. HF 1896 and HF 2125, both proposed by Representative Karen Clark, would raise taxes on alcohol and use the revenues to pay for public safety, health and courts costs related to alcohol use.

Three kinds of taxes are currently imposed on alcoholic beverages. A general excise tax is imposed on alcohol by the gallon or barrel and is paid at the wholesale level. The amount of the tax varies quite a bit depending on the alcohol content and type of spirit in question. For example, wine with 14% alcohol content or less is taxed at 30 cents per gallon, while distilled spirits are taxed $5.03 per gallon. And so on. In this way, these taxes are different from the general sales tax, which is a percentage of the sales price. As a result, these alcoholic beverage taxes don’t automatically increase as prices rise with inflation – and in fact, they haven’t been raised since 1987. In FY 2008, this tax collected $73 million.

In addition, when alcoholic beverages are bought at the retail level – whether at a liquor store or at a bar or restaurant – consumers pay the general sales tax, plus an additional 2.5% gross receipts tax.

The two bills vary in how much and which taxes are raised. The increases in HF 2125 roughly equate to a “dime a drink” and would raise $530 million in the FY 2010-11 biennium for the general fund. The Department of Revenue estimates that HF 1896 would raise $215 million in FY 2010-11 for the general fund and a similar amount for an alcohol and judicial impact fund.

Cigarette and tobacco taxes are another sin tax that is in the mix. Cigarettes and other tobacco products are taxed at a certain number of cents per unit. The current tax for cigarettes is $1.50 per pack. HF 2263, which encapsulates the Governor’s 21st Century Tax Reform Commission’s recommendations, includes a $1 per pack increase in the state cigarette tax as one of the ways to pay for a broad tax reform package that includes repeal of the corporate income tax (the Governor did not endorse the cigarette tax part of this).

HF 2194, also heard by the House Tax Committee on Wednesday, would similarly raise cigarette taxes by $1.00 per pack and raise taxes on other tobacco products. HF 2194 is estimated to raise $312 million in FY 2010-11, nearly all of which would be dedicated to the Health Care Access Fund. The amount of revenue generated decreases in later years, as fewer people smoke.

However, the cigarette tax is the most regressive tax in Minnesota - that is, the lower your income, the larger the share of income you pay in cigarette taxes. But health advocates argue that higher cigarette taxes lead to less smoking, with all the associated benefits of lower health care costs and improved health.

Some argue that sin taxes have more of a chance of garnering support than other taxes. Steve Perry of Politics in Minnesota reports that “House DFLers are bullish on the potential to bring together the party’s liberals and normally tax-averse Democratic moderates and conservatives with tax hikes on cigarettes and alcohol.” He also points out that Governor Pawlenty supported a tax increase on cigarettes back in 2005 (termed a “health impact fee”). We’ll see whether that is indeed the case when we see whether such proposals are included the omnibus tax bills to be released next week.

This sin tax talk is not isolated to Minnesota. The National Conference on State Legislatures reports that close to 20 states are considering a cigarette tax increase, and have a useful map charting cigarette taxes in all states. The feds have also gone to the well on this one – on April 1, the federal cigarette excise tax increased to $1.01 (the revenue helps pay for the State Children’s Health Insurance Program or SCHIP).

-Katherine Blauvelt and Nan Madden

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