April 11, 2003
Let's Be Realistic About Tobacco and Gambling Revenue
It is well known that the value of any artwork goes up when the artist passes away. What is less well known, but equally true, is that the same can often be said for the advice of economists. Indeed, the debate going on right now over Indiana's budget deficit would be well informed by some of the observations penned by economists more than 100 years ago.
These long dead economists and philosophers recognized that the best course of action in a competitive environment depends on how you think others will react to what you do. Unfortunately, in our projections of tax revenue from the formerly sinful -- but now publicly welcomed -- activities of smoking and gambling, we pay this advice little heed. As a result, the dollars we're banking on to plug the holes in our state's leaking balance sheet may prove to be a mirage.
Our legislature, to its credit, maintained a healthy level of skepticism about the viability of the tobacco lawsuit settlement monies when it crafted its plan for their disposition in 1999. Of course, with tax coffers running over with revenues at that time, we could afford to adopt a wait-and-see attitude about these new dollars seemingly falling from the sky.
The recession has changed all of that. The pressure to pay our bills has increased many-fold, and plans are coming out of the woodwork that involve committing tobacco payments to meet our essential budget needs.
But those plans largely ignore two perfectly predictable reactions that threaten the future of this revenue stream. The first stems from the huge price increase that tobacco companies immediately instituted to finance the settlement payments. The 65 percent increase in cigarette prices in 1999 has made many smokers give up their name brand puffs in favor of imported or off-brand products not party to the states' lawsuit. And it even made people smoke less.
More ominous is the reaction of the legal community. After laying unsuccessful siege to big tobacco for several decades, do we really think that trial lawyers across the land will let up at this first taste of success? With lawyers' war chests fattened immeasurably, and the facade of tobacco's legal invincibility forever gone, even money says that tobacco companies will soon be joining asbestos producers on the list of extinct industries.
That's great news for anyone who is concerned about our health and well-being. But in the topsy-turvy world of "sin" taxes, we don't really want people to quit the habit. We just want them to pay more for the privilege of doing so.
Gambling as a source of public revenue has only a slightly longer track record in Indiana than tobacco lawsuit proceeds. Yet in that short time states like us have learned that tax receipts derived from different forms of gambling can wax and wane. Sometimes that occurs as the games themselves lose their allure, as has occurred in some of the lottery games. For other forms of gambling, it's competition that's rocking the boat. And sometimes the toughest competition is with ourselves.
Expansions in gambling have a ripple effect that can diminish their ultimate tax impact. Older forms of gambling, like horse race wagering, can suffer when slot machines and pull tabs start showing up on every corner. New casinos steal business from existing ones. And as all forms of gambling proliferate, the marketing expenses required to get people to play the ones in your state escalate.
We'd be wise to take these reactions into account before we start banking on these new dollars arriving in the state treasury.
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