New Sin Taxes: Vaping, Recreational Marijuana, and Sports Betting are on the Rise

States across the country are throwing a sin tax party and the guests of honor are vaping, recreational marijuana, and sports betting.  Each of these industries are taking off, and many states are moving quickly to get in on these new sources of tax revenue.

Sin taxes have historically been levied on alcohol, gambling, and tobacco.  In theory sin taxes are designed to discourage certain behaviors.  But they are also a nice stream of tax revenue for states and local governments.  Currently, there is a trifecta of new sins that many states are looking to tax:

  • vaping;
  • recreational marijuana; and
  • sports betting.

Vaping Taxes are Blowing Your Way 

As vaping has been on the rise, more and more states are eyeing it as a potential tax revenue source.  Some states have been quick to act.  Other states have been slow to make changes.  And, the states that have enacted laws to tax vaping have taken some different approaches.

Some states choose to tax e-cigarettes and vaping pens.  While other states take the approach of taxing the liquids and gels used in vaping.

And, some of the rates that states are currently taxing or looking to tax vaping products are remarkable.  In Connecticut, the Governor has called for a 75% tax on vaping products.  The Vermont Governor supports a 92% wholesale tax on e-cigarettes.

In California, the rate is currently set at 62.78%.  In the spring of 2017, the rate was 27.30%.  So, California’s vaping tax rate has more than doubled in that short time.

As cigarette use has fallen, so has cigarette tax revenue. As vaping use rises, more states will move towards taxing vaping products to fill in the revenue shortfall from cigarette taxes.  The vaping tax is a sin tax that most states are expected to enact soon if they haven’t already.

Recreational Marijuana Taxes are Growing Like Weeds 

Ten states have legalized recreational marijuana so far. Throughout 2018, 21 states considered bills to legalize.

However, many states are doing a wait-and-see approach and closely watching the states that have already legalized to see how it plays out.  They want to know what the downside of legalizing looks like.  But, they also want to know what is the best way to tax this complicated market.

How High is Too High?

The big question with recreational marijuana is “What is the right tax rate?”  And, the answer isn’t entirely clear, yet.  States have enacted tax rates ranging from about 10% to 37%.  And, those rates do not include the additional state sales taxes or any local taxes.

Washington was one of the first two states to allow legal sales of recreational marijuana in 2014.  Washington set their tax rate at 37%.  It remains the highest rate in the nation on recreational marijuana.

Is Marijuana Legal in the State Next Door?

Many factors play into where a state sets the rate.  The balancing act comes from trying to maximize tax revenues, but not chasing away customers to the illegal market.  Colorado reduced their tax rate when they had concerns that they were losing too many customers to the illegal market.  So, states must find the right balance, but it’s a different balancing act in every state.  If a neighboring state has legalized already, and has a significantly lower rate, that could cut into revenue.  If the black market in a state is not strong, it’s easier to have a higher rate.  If there is a strong illegal market, a higher tax rate will be a struggle.

A Sports Betting Tax is a Safe Bet

A U.S. Supreme Court decision in May of 2018 allowed states to legalize sports betting.  By the end of 2018, seven states already had legal sports betting markets.  And, about 30 more states are expected to consider sporting betting bills in 2019.

But, again, the big question is where to set the tax rate.  States are all over the place with their rates.  Rates range from 9.25% in New Jersey to 51% in Rhode Island.

Pennsylvania has doubled down on sports betting.  Not only did they set a 36% tax rate on sports betting, they enacted a $10 million licensing fee to sports betting operators.  But, the bet seems to be paying off.  Even though the industry is still getting up and running, in December 2018 sports betting taxes brought in $2 million.  And, that’s not even including the millions in licensing fees that were collected.  And, the revenue numbers are only expected to climb as the market grows.

Who Invited the Feds to the Sin Tax Party? 

The federal government doesn’t want to be left out of the sin tax party, either.  In January 2019, a bill was introduced in the House that would add a federal excise tax to vaping products. And, in December 2018 a bipartisan bill was introduced in Congress that included a federal sports betting tax.

As for recreational marijuana, it’s a bit more complicated.  Under federal law, cannabis is still an illegal drug.  So, before the feds can even think about enacting a federal marijuana tax, they have some legalization obstacles to overcome.

With the wave of new sin taxes sweeping the country, many expect the feds to eventually show up to the party with signed legislation. In the meantime, it’s a safe bet that the states will keep the sin tax party hopping on their own.

By Noelle Erber, J.D.

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All stories by: CCHTaxGroup