More States Find Virtue In ‘Sin Taxes’, New Way to Pay for Early Education

Tobacco, Gambling, Beer and Wine Are Easy Targets, But Critics Are Beginning to Question Whether Such Taxes Are a Reliable Source of Revenue—Or Even Fair

These days, it's hard to find an expert who doesn't see the value of early education. Even economists at the Federal Reserve--most recently the Cleveland Federal Reserve--are trumpeting the power of public preschool to boost children's success in school and beyond.

Yet, there's still one stubborn obstacle--the one that lies at the center of most public programs--funding it. With many states facing deficits, finding money to pay for preschool programs is harder than ever.

That's why a growing number of states, from California to Georgia, are turning to sin taxes to fund early education. "In an anti-tax environment, sin taxes are far more palatable to the general public," says Bert Waisanen, fiscal analyst for the National Council of State Legislatures. "Slapping a tax on tobacco can be seen as an anti-smoking policy, instead of just a new tax. That's a whole lot easier to sell these days."

It's a practice as old as politicians, and a winning strategy in small doses. Excise taxes on luxury items, such as furs and yachts, have long played a small role in funding government budgets. But these days, sin taxes, especially those on tobacco and alcohol--along with revenues from gaming--are playing an ever-larger role in paying for early education. California's First Five program derives nearly all its funds--more than $3 billion so far--from a tax on cigarettes earmarked specifically for public preschool and child health programs. More than 30 other states have also raised taxes on tobacco, with some of the money similarly directed to early childhood programs. Arkansas turned to a tax on beer to expand its preschool program.

"Tobacco is clearly the most popular 'sin' to be taxed," says Waisanen, "but it's definitely not the only one. We see proposals for taxing adult entertainment, cosmetic surgery that's not medically necessary, and even soda and espresso."

The last two on the menu--soda and espresso coffee--have both been proposed in Washington state; one of the many states strapped for cash to pay for public education and one of a handful that still has no income tax. Oakland, California's Mayor Jerry Brown proposed taxing junk food, including chocolate.

Many states have turned to lotteries and gambling to fund early education, with Georgia leading the way. That state got its universal public preschool initiative off the ground by launching its lottery, which also pays for college scholarships.

A growing number of policy analysts are beginning to ask just how well these sin taxes work. Policy papers from Connecticut to Illinois, Washington, D.C. to Washington State, explore the strengths and weaknesses of this approach.

Key Questions
The authors of several recent reports have serious reservations. "Any kind of revenue raising done by a state should meet basic principles of good tax policy," says Ann Courter, director of budget and tax policy at Voices for Illinois Children. "It should be equitable, adequate and stable."

Sin taxes may fail all three of these tests, according to some analysts. For starters, they are regressive, falling hardest on working class and low-income people. "Cigarette and alcohol taxes are the same for everyone, but they consume a larger percentage of a low-income person's income," says Zach Schiller, director of research at Ohio Policy Matters. "So they are not progressive at all. I think it is reprehensible for us to simply impose the most regressive taxes without considering ones that would be fairer for most Ohioans."

In most cases, such taxes also fail to produce enough money to sustain large-scale social programs, such as public preschool for all children. "The beer tax proved to be a good thing in Arkansas in terms of energizing people and bringing attention to the issue, but it still constitutes a very small amount of the total revenue it takes to support our preschool program," says Rich Huddleston, director of Arkansas Advocates for Children and Families.

Finally, taxes on beer, cigarettes, adult entertainment and gaming do not produce a stable source of funding, one that preschool programs can count on from year to year. "The whole idea of a tax on cigarettes is to discourage smoking, and that's the logic of most 'sin' taxes," says Waisanen from NCSL. "So that means that policymakers expect the revenues to dwindle over time."

So why are sin taxes gaining so much favor? Why is the number of proposals not only growing, but growing more diverse?
The answer appears to be for a number of reasons that make good political sense for those wishing to gain a foothold in or expand early childhood programs.

The Winning Impact
Sin taxes can produce a gusher in revenues at first, which can help launch an ambitious new preschool program.

California's new 50-cents-a-pack tax on cigarettes, for example, passed by voters several years ago, has generated nearly $4 billion so far, all of it earmarked for early childhood health and education programs. As a result, Los Angeles County received $600 million to create universal preschool for 4-year-olds in Los Angeles county--all 153,000 of them. "It's a dream come true," says Beth Lowe, long-time advocate of early education and vice chair of the local commission overseeing the program. She called the expansion "the most exciting thing I've ever been involved in."

Arkansas' new 3 percent tax on every six-pack of beer, enacted by state lawmakers in 2001, produced a more modest but still notable impact on preschool in that state, raising about $14 million a year. "That funds only a fraction of the program, but it came at an important time, when it was hard to find money for expansion," says Terry Baker, a lobbyist and early education provider in Arkansas. "And to be honest, consumers of beer have not even noticed they have a new tax."

John Burbank, executive director of the Economic Opportunity Institute dismisses the argument that revenues from cigarette taxes will diminish any time soon. "I wish they would, but the reality is that adults adjust to the new cost and keep on smoking. So it's proved a stable source of revenues," he says. "The hope is that the teens will never become smokers, so it's true that in 40 years, we may have to come up with another source of revenue. But by then, you hope there's enough popular support for early childhood programs to keep them funded."

He also contends that if properly crafted, a sin tax can be a rather progressive one, which puts the burden on those who can easily afford it. Indeed, his institute led a campaign several years running to win a new tax on espresso drinks, a levy that would have fallen primarily on middle- and upper-income consumers who can afford to spend $2.50 for a latte. "We felt that another few pennies was not going to hurt their budgets, nor were we asking for a tax on an essential commodity, such as gasoline or food. This was truly progressive in nature."

So what's the consensus on sin taxes? "I don't think you can rule them all out, without taking a careful look at each one, the way it might work and the way it can address a need and a public good," says Burbank. Huddleston in Arkansas argues that the beer tax there helped rally support for early education at a critical moment. "That new revenue gave us a boost, new energy and helped us make a crucial expansion. Without it, I'm not so sure we could have maintained the energy it has taken to win a larger expansion of our preschool program."

That underscores an emerging view as policymakers and educators move forward. "Now that we have a good program in place, there's widespread support for it, both among the public and in the legislature. It's my feeling that we could now get the votes to keep the program going, even if we lose the beer tax," says Huddleston. Indeed, a number of forces have now emerged to fuel an expansion of public pre-K in Arkansas. A state Supreme Court decision, combined with growing public sentiment and widespread support among parents, led lawmakers there to approve $40 million for preschool last year--and many expect another $40 million this winter. "My feeling is that even though these sin taxes are not ideal, and you always hope to have a progressive tax, like an income tax, sometimes this kind of strategy can be crucial in advancing the program," he says.

Several policy papers by early childhood advocates now address the pros and cons of sin taxes, including: "Sin Taxes: What Are They & What Are the Benefits and Harms From Imposing Them?" Connecticut Voices For Children, www.ctkidslink.org; "Beware the Quick Fix--Bet on Comprehensive Tax Reform, Not Gaming Expansion," Voices for Illinois Children, Budget and Tax Policy Initiative, www.voices4kids.org. "Cigarette Tax Increases: Cautions and Considerations," Iris J. Lav, Center on Budget and Policy Priorities, www.cbpp.org. Also see, "Nick Johnson Teleconference, October 27, 2004," a roundtable with state officials on tax and revenue issues, also at www.cbpp.org.