A revenue calculator is supposed to…calculate revenue, right? Well, the Marin Institute’s tax revenue calculator accurately considers excise tax rates, sales tax rates, consumption, and retail price for alcohol, yet it ignores perhaps some of the most influential factors in determining sales and thus revenue, especially in areas near state borders: interstate competition and smuggling.
When states possess lower taxes than their neighbors, many potential customers follow their wallets to cheaper alcohol. This can lead them across state borders. For example, in 2009, Illinois raised spirits, wine, and beer taxes by as much as 90%. As a result, sales of alcoholic beverages in neighboring Missouri spiked by 41%, representing an estimated $2-3 million loss in alcohol tax collection in Illinois.
It is odd that many of these tax calculations and programs are frequently off by millions and sin taxes commonly do not meet revenue estimates. In fact, between 2003 and 2007, only 16 of the near 60 cigarette tax hikes actually met revenue estimates. We should consequently ask ourselves, “Why are sin taxes frequently less effective than estimated?”
First, the problem with most of these revenue estimates is that they are created through simplified economic formulas such as those utilized by the aforementioned revenue calculator. Many of these formulas can ignore variables affecting consumption and costs, such as smuggling and interstate competition. This can lead to skewed results. Furthermore, there are frequently multiple studies declaring different values for elasticity of demand. What this means is that some studies can overestimate or underestimate peoples’ willingness to buy a good when the price of that good increases or decreases. Accordingly, revenue projections can be off by millions.
This projection inaccuracy is rampant in much of the discussion concerning sin taxes and revenue estimates. According to the Campaign for Tobacco Free Kids’ tax revenue calculator, if New Jersey raises the cigarette tax by $1 per pack, they’ll bring in $80 million in higher revenue. Yet, New Jersey raised the cigarette tax a mere 17.5-cents in 2007, only to collect $52 million less than projected and $22 million below what they collected before the tax hike. According to the Campaign for Tobacco Free Kids and their tax calculator, the District of Columbia was projected to gain millions in tax revenue via a 50-cent cigarette tax increase in 2009. Despite presenting their revenue projections as if they were absolute facts, estimates released in February, just months later, show the tax hike will bring in $15 million less than projected and cigarette tax revenue will actually be $7.6 million less than pre-hike levels.
Smuggling and interstate competition are not minor issues. Cigarette smuggling is a large and profitable business. Additionally, the businesses laying off workers or closing down as customers drive across state lines for products are very much in turmoil.
If organizations are going to use tax revenue “calculators” to prove a point, they should at least use accurate numbers that take into account the relevant, obvious variables. Failure to do so is mere laziness or perhaps an ignorance of the facts.