State of Sin

States are becoming increasingly permissive of various “sinful” economic activities and goods — those understood to be harmful for consumers — allured, at least in part, by the promise of tax revenue they represent. This has certainly been part of the rationale in my home state of Massachusetts, where within the last year the first full casino — MGM Springfield, located a few blocks from my apartment — and recreational marijuana dispensaries opened. Since the fiscal year just ended, now seems like a good time to assess how things are going in that regard.

First, the casino: Before opening its doors, MGM Springfield told state regulators it expected $418 million in gambling revenue over its first full twelve months of operation — $34.8 million per month. According to the Massachusetts Gaming Commission’s June 2019 report, it hasn’t come within $7 million of that mark yet.

MGM revenue

Since September, its first full month of operation, the casino has generated nearly $223 million in gambling revenue. The state’s take is a quarter of that, about $55.7 million. That’s two-thirds of what was estimated. MGM Springfield’s President attributes its lower-than-expected revenue to a poor projection of the casino’s clientele — fewer “high rollers” from the Boston area and more from up and down the I-91 corridor.

The introduction of new avenues for gambling is well known to cannibalize existing revenue sources. So add to MGM Springfield’s list of woes that the much flashier Wynn Casino recently opened in Everett, MA, a quick trip from Boston, and that neighboring East Windsor, CT is opening another casino next year.

casinos

Massachusetts’ venture into marijuana has been slightly more successful. Sales were supposed to begin in July 2018, the start of the fiscal year, but were delayed until November. Still, the State Revenue Commissioner estimated Massachusetts would collect between $44 million and $82 million from the combined 17% tax (Massachusetts’ normal 6.25% sales tax plus a 10.75% excise tax) over fiscal year 2019. If my math is right, that works out to an expected range of about $32 million to $60 million in sales every month for the remaining eight months of the fiscal year, a threshold met for the first time in May, according to sales data from the Massachusetts Cannabis Control Commission.

Marijuana revenue

As of June 26, the last time the data were updated, marijuana sales totaled $176 million, which would put tax revenue somewhere around $22 million this fiscal year. Not bad, but not a great show either — and a bit surprising to me, given the traffic I’ve had to wade through passing a dispensary on my way to work. Furthermore, the state is probably constrained in its ability to raise the excise tax on marijuana, since that could push buyers back into the informal market. And as more states in the region legalize, there’s a good chance sales will drop off somewhat.

On the other hand, sales of marijuana are clearly ramping up as more stores open, and making projections about a brand new industry can’t be easy. I think people more knowledgeable about the regulatory rollout would also contend that Massachusetts bureaucrats are at least partly responsible for the relatively poor sales. The first shops were concentrated in low-population areas of the state, and the closest one to Boston didn’t open until March. Still, the state was off on this one, too. (I thought I was the only one to notice this, but I guess not.)

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A few admittedly tangential reflections on this: The positive spin on the commercialization of marijuana and the proliferation of casinos is that the state is growing more respectful of individual autonomy, abandoning harmful and ultimately unsuccessful prohibitive policy and allowing market forces to dictate what forms of entertainment are viable. If the state should make a few bucks in the process, all the better. Right?

Well, maybe. My natural sympathies lie with the above assessment, but the state’s financial incentive complicates the picture — especially insofar as new sin taxes are attractive alternatives to the prospect of raising traditional taxes.

Taxing the consumption of vices is a markedly regressive form of revenue generation. The most salient example of this is tobacco: its use is more common among those with less education and those below the poverty line, and among smokers, those populations suffer greater negative health effects. But it’s also broadly true that the majority of profits derived from the sale of vices tend to be concentrated among a relatively small group of “power users.” The top tenth of drinkers consume half of all alcohol sold in the United States, for example. I don’t have any data on this at the moment, but if I had to guess, the pathological consumption of vices is probably negatively correlated with the propensity to vote.

The cynical take, therefore, is that the newfound permissiveness of the state is a financially motivated abdication of the state’s most fundamental obligations, a mutually beneficial pact between “limbic capitalists” and politicians.

Ironically, sin taxes have notable limitations as revenue-raisers. For one, unlike other taxes, sin taxes are supposed to accomplish two contradictory goals: curbing consumption and raising revenue. Attention to the former usually requires that tax rates be imposed at higher than revenue-maximizing points. This can also encourage regulators, as with alcohol and tobacco, to tax on a per-unit basis, tying revenue growth to consumption patterns. While they may be tempting stop-gaps, sin taxes are not a long-term budgetary fix, and analysis of their social costs and fiscal benefits should bear that in mind.

Business Is Getting Political—and Personal

As anyone reading this blog is undoubtedly aware, Sarah Huckabee Sanders, the current White House Press Secretary, was asked last month by the owner of a restaurant to leave the establishment on the basis that she and her staff felt a moral imperative to refuse service to a member of the Trump administration. The incident, and the ensuing turmoil, highlights the extent to which business has become another political battleground—a concept that makes many anxious.

Whether or not businesses should take on political and social responsibilities is a fraught question—but not a new one. Writing for the New York Times in 1970, Milton Friedman famously argued that businesses should avoid the temptation go out of their way to be socially responsible and instead focus on maximizing profits within the legal and ethical framework erected by government and society. To act otherwise at the expense profitability, he reasoned, is to spend other people’s money—that of shareholders, employees, or customers—robbing them of their agency.

Though nearing fifty years of age, much of Milton Friedman’s windily and aptly titled essay, The Social Responsibility of Business Is to Increase Profits, feels like it could have been written today. Many of the hypotheticals he cites of corporate social responsibility—“providing employment, eliminating discrimination, avoiding pollution”—are charmingly relevant in the era of automation anxiety, BDS, and one-star campaigns. His solution, that businesses sidestep the whole mess, focus on what they do best, and play by the rules set forth by the public, is elegant and simple—and increasingly untenable.

One reason for this is that businesses and the governments Friedman imagined would reign them in have grown much closer, even as the latter have grown comparatively weaker. In sharp contrast to the get-government-out-of-business attitude that prevailed in the boardrooms of the 1970s, modern industry groups collectively spend hundreds of millions to get the ears of lawmakers, hoping to obtain favorable legislation or stave off laws that would hurt them. Corporate (and other) lobbyists are known to write and edit bills, sometimes word for word.

You could convincingly argue that this is done in pursuit of profit: Boeing, for example, spent $17 million lobbying federal politicians in 2016 and received $20 million in federal subsidies the same year. As of a 2014 report by Good Jobs First, an organization that tracks corporate subsidies, Boeing had received over $13 billion of subsidies and loans from various levels of government. Nevertheless, this is wildly divergent from Friedman’s idea of business as an adherent to, not architect of, policy.

As business has influenced policy, so too have politics made their mark on business. Far more so than in the past, today’s customers expect brands to take stands on social and political issues. A report by Edelman, a global communications firm, finds a whopping 60% of American Millennials (and 30% of consumers worldwide) are “belief-driven” buyers.

This, the report states, is the new normal for businesses—like it or not. Brands that refrain from speaking out on social and political issues now increasingly risk consumer indifference, which, I am assured by the finest minds in marketing, is not good. In an age of growing polarization, every purchase is becoming a political act. Of course, when you take a stand on a controversial issue, you also risk alienating people who think you’re wrong: 57% of consumers now say they will buy or boycott a brand based on its position on an issue.

This isn’t limited to merely how corporations talk. Firms are under increasing social pressure to hire diversity officers, change where they do business, and reduce their environmental impact, among other things. According to a 2017 KPMG survey on corporate social responsibility, 90% of the world’s largest companies now publish reports on their non-business responsibilities. This reporting rate, the survey says, is being driven by pressure from investors and government regulators alike.

It turns out that a well marketed stance on social responsibility can be a powerful recruiting tool. A 2003 study by the Stanford Graduate School of Business found 90% of graduating MBAs in the United States and Europe prioritize working for organizations committed to social responsibility. Often, these social objectives can be met in ways that employees enjoy: for example, cutting a company’s carbon footprint by letting employees work from home.

In light of all this, the choice between social and political responsibility and profitability seems something of a false dichotomy. The stakes are too high now for corporations to sit on the sidelines of policy, politics, and society, and businesses increasingly find themselves taking on such responsibilities in pursuit of profitability. Whether that’s good or bad is up for debate. But as businesses have grown more powerful and felt the need to transcend their formerly transactional relationships with consumers, it seems to be the new way of things.